TY - JOUR
T1 - Signaling in monetary policy near the zero lower bound
AU - Salas, Sergio
AU - Nuñez, Javier
N1 - Publisher Copyright:
© 2020 Walter de Gruyter GmbH, Berlin/Boston 2020.
PY - 2020/1/1
Y1 - 2020/1/1
N2 - What are the consequences of asymmetry of information about the future state of the economy between a benevolent Central Bank (CB) and private agents near the zero lower bound? How is the conduct of monetary policy modified under such a scenario? We propose a game theoretical signaling model, where the CB has better information than private agents about a future shock hitting the economy. The policy rate itself is the signal that conveys information to private agents in addition to its traditional role in the monetary transmission mechanism. We find that only multiple "pooling equilibria" arise in this environment, where a CB privately forecasting a contraction will most likely follow a less expansionary policy compared to a complete information context, in order to avoid making matters worse by revealing bad times ahead. On the other hand, a CB privately forecasting no contraction is most likely to distort its complete information policy rate, the consequences of which are welfare detrimental. However, this is necessary because deviating from the pooling policy rate would be perceived by private agents as an attempt to mislead them into believing that a contraction is not expected, which would be even more harmful for society.
AB - What are the consequences of asymmetry of information about the future state of the economy between a benevolent Central Bank (CB) and private agents near the zero lower bound? How is the conduct of monetary policy modified under such a scenario? We propose a game theoretical signaling model, where the CB has better information than private agents about a future shock hitting the economy. The policy rate itself is the signal that conveys information to private agents in addition to its traditional role in the monetary transmission mechanism. We find that only multiple "pooling equilibria" arise in this environment, where a CB privately forecasting a contraction will most likely follow a less expansionary policy compared to a complete information context, in order to avoid making matters worse by revealing bad times ahead. On the other hand, a CB privately forecasting no contraction is most likely to distort its complete information policy rate, the consequences of which are welfare detrimental. However, this is necessary because deviating from the pooling policy rate would be perceived by private agents as an attempt to mislead them into believing that a contraction is not expected, which would be even more harmful for society.
KW - Zero lower bound
KW - monetary policy
KW - signaling
UR - http://www.scopus.com/inward/record.url?scp=85050163457&partnerID=8YFLogxK
U2 - 10.1515/bejm-2016-0114
DO - 10.1515/bejm-2016-0114
M3 - Article
AN - SCOPUS:85050163457
VL - 20
JO - B.E. Journal of Macroeconomics
JF - B.E. Journal of Macroeconomics
SN - 1935-1690
IS - 1
M1 - bejm-2016-0114
ER -