News Management in Monetary Policy: Why Central Banks Lie to the Government

Working Paper Number 97-16

Posted: 10 Mar 1998

See all articles by Helge Berger

Helge Berger

Free University Berlin - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute for Economic Research)

Marcel P. Thum

Dresden University of Technology - Faculty of Economics and Business Management; CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute; Institute for Corruption Studies

Date Written: July 1997

Abstract

The literature on central banking so far has provided explanations of why we observe independent central banks and why central banks are usually more conservative than governments. However, little is known about the interaction between the two institutions. Bridging the gap, we focus on the central bank's strategic news management towards the government when the central bank has private (but incomplete) information on the state of the economy. A central bank that is better informed than the government can exploit this asymmetry to carry out a low inflation policy without facing government intervention. Strategic news management in the sense of withholding information is an equilibrium. A simple extension of our findings is that, if the government occasionally learns about the central bank's true information, it actually does overrule the central bank's decision on monetary policy. This might help to explain some real-world conflicts between central banks and governments.

JEL Classification: E58, E63, D82

Suggested Citation

Berger, Helge and Thum, Marcel, News Management in Monetary Policy: Why Central Banks Lie to the Government (July 1997). Working Paper Number 97-16, Available at SSRN: https://ssrn.com/abstract=65029

Helge Berger

Free University Berlin - Department of Economics ( email )

Boltzmannstr. 20
Berlin 14195, 14195
Germany
+49 30 838-54037 (Phone)
+49 30 838-52782 (Fax)

HOME PAGE: http://www.wiwiss.fu-berlin.de/berger/eng_index.htm

CESifo (Center for Economic Studies and Ifo Institute for Economic Research) ( email )

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Munich, DE-81679
Germany
+49 89 9224 1266 (Phone)
+49 89 9224 1409 (Fax)

HOME PAGE: http://www.CESifo.de

Marcel Thum (Contact Author)

Dresden University of Technology - Faculty of Economics and Business Management ( email )

Mommsenstrasse 13
Dresden, D-01062
Germany

CESifo (Center for Economic Studies and Ifo Institute) - Ifo Institute ( email )

Poschinger Str. 5
Munich, 01069
Germany

Institute for Corruption Studies

Stevenson Hall 425
Normal, IL 61790-4200
United States

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