Central bank communication design in a Lucas-Phelps economy

• Published in: Journal of monetary economics Vol. 63; pp. 64 - 79
• Main Authors: Myatt, David P., Wallace, Chris
• Format: Journal Article
• Language: English
• Published: Amsterdam Elsevier B.V 01-04-2014; Elsevier Sequoia S.A
• Subjects: Central bank design; Central banks; Communication; Coordination in beauty-contest games; Correlation analysis; Economic information; Economic models; Economic theory; Financial incentives; Information acquisition; Information sharing; Lucas-Phelps island economies; Monetary policy; Optimal announcements; Output; Public and private information; Studies; Optimal announcements; Lucas-Phelps island economies; Central bank design; Coordination in beauty-contest games; Public and private information
• ISSN: 0304-3932; 1873-1295
• DOI: 10.1016/j.jmoneco.2014.01.003

In a Lucas-Phelps island economy, an island has access to many informative signals about demand conditions. Each signal incorporates both public and private information: the correlation of a signal׳s realizations across the economy determines its publicity. If information sources differ in their publicity then price-formation and expectations-formation processes separate, causing output gaps to open. An output-stabilizing central bank prefers “averagely public” information, and sometimes limits the clarity of its policy announcements to achieve this. The bank׳s incentive to engage privately in costly information acquisition and transmission is strongest not for the most influential signals, but instead for those which drive the largest wedge between prices and expectations: signals that are far from averagely public.
•Studies a Lucas-Phelps island economy with multiple signals of uncertain demand.•Abandons the “public vs. private” distinction to allow intermediate publicity of signals.•Different publicities drive apart price-formation and expectations-formation processes.•An output stabilizing central bank prefers “averagely public” announcements.•However, incentives for information provision are lower for averagely public signals.