Finance and Economics Discussion Series (FEDS)
Central Bank Communication with a Financial Stability Objective
An endogenous financial crisis is introduced into the canonical model used to study central bank transparency. The central bank is endowed with private information about the real economy and credit conditions which jointly determine financial vulnerabilities. An optimal choice is made regarding whether to communicate this information to the public. A key finding is that the optimal communication strategy depends on the state of the credit cycle and the composition of shocks driving the cycle. From a policy perspective, this raises the possibility that central bank communication in the presence of a financial stability objective faces a time inconsistency problem.
Keywords: Financial stability report, Information disclosure, Survey of economic projections, Time inconsistency problem, Transparency
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