Does Transparency of Central Banks Produce Multiple Equilibria on Currency Markets?

Authors

  • Axel Lindner

    1. Halle Institute for Economic Research, D-06108 Halle (Saale), Germany
      axel.lindner@iwh-halle.de
    Search for more papers by this author
    • * 

      I would like to thank Frank Heinemann, the participants in a session of ESEM 2004 in Madrid, an anonymous referee and the editor for helpful comments. Any errors are my own.


Abstract

A recent strand of literature shows that multiple equilibria in models of markets for pegged currencies vanish if there is slightly diverse information among traders; see Morris and Shin (2001). It is known that this approach works only if the common knowledge in the market is not too precise. This has led to the conclusion that central banks should try to avoid making their information common knowledge. We develop a model in which more transparency of the central bank implies better private information, because each trader utilises public information according to her own private information. Thus, transparency makes multiple equilibria less likely.

Ancillary