The authors thank Carin van der Cruijsen, two anonymous referees, and seminar participants at Rabobank, Utrecht University, De Nederlandsche Bank, Chinese University of Hong Kong, and the Hong Kong Monetary Authority.
Central Bank Transparency and the Crowding Out of Private Information in Financial Markets
Article first published online: 18 MAY 2011
© 2011 The Ohio State University
Journal of Money, Credit and Banking
Volume 43, Issue 4, pages 765–774, June 2011
How to Cite
KOOL, C., MIDDELDORP, M. and ROSENKRANZ, S. (2011), Central Bank Transparency and the Crowding Out of Private Information in Financial Markets. Journal of Money, Credit and Banking, 43: 765–774. doi: 10.1111/j.1538-4616.2011.00395.x
- Issue published online: 18 MAY 2011
- Article first published online: 18 MAY 2011
- Received September 2, 2008; and accepted in revised form August 25, 2010.
- monetary policy;
- information and financial market efficiency;
- information acquisition
We use an asset market model based on Diamond (1985) to demonstrate that increased central bank transparency may lead to crowding out of costly private information, which can result in a market that is less able to predict monetary policy. Consequently, for intermediate levels of public information precision, it is optimal for the central bank to actually disclose less than it knows. We show that such crowding out can occur, even in the likely scenario that public information is more precise than private information, under the plausible assumption that traders are nearly risk neutral. Central banks should be aware of possible adverse effects of transparency and take note if market participants reduce investment in information.