Social Value of Public Information

Abstract

What are the welfare effects of enhanced dissemination of public information through the media and disclosures by market participants with high public visibility? We examine the impact of public information in a setting where agents take actions appropriate to the underlying fundamentals, but they also have a coordination motive arising from a strategic complementarity in their actions. When the agents have no socially valuable private information, greater provision of public information always increases welfare. However, when agents also have access to independent sources of information, the welfare effect of increased public disclosures is ambiguous.

Transparency of Monetary Policy: Theory and Practice

“…Suppose that economic agents with private signals have a motive to coordinate their actions (such as in financial markets) and therefore put a disproportionately high weight on a public signal sent by the central bank. Then, greater central bank transparency increases the reliance on the public signal even further, which could lead to greater volatility when the public signal is sufficiently noisy (Morris and Shin 2002). The increased focus on public communications due to a coordination motive also reduces the informativeness of market signals (Shin and Morris 2005).…”

“…Furthermore, when the level of the target is highly uncertain (e.g. the natural rate of output, or fundamental asset prices) and the central bank is unlikely to have superior information about it compared to the private sector, disclosure of the target could cause financial market participants to ignore their private information and coordinate on the noisy disclosed target, leading to greater volatility (cf Morris and Shin 2002). With respect to the functional form, monetary policymakers benefit from not admitting to an asymmetric output objective that puts greater weight on output losses, because it leads to a bias in average inflation.…”

“…When supply or transmission shocks are disclosed, the public could incorporate them into its inflation expectations, which leads to greater inflation volatility and hampers output stabilization (Cukierman 2001, Jensen 2002. Furthermore, there could be damaging incentive effects that increase economic and financial volatility when the public information is noisy and agents put too much weight on it to coordinate their actions (Morris and Shin 2002).…”

“…However, the publication of an optimal policy rate path could also give rise to a detrimental incentive effect when financial market participants decide to ignore their private signals and coordinate their actions on the published policy path (cf Morris and Shin 2002). The reason is that the central bank's policy projection could be quite noisy compared to private sector information because the optimal path for the policy rate depends on the market reactions to policy settings, about which financial market participants are likely to have better information than the central bank.…”

Beauty Contests and Irrational Exuberance: A Neoclassical Approach

“…This game-theoretic representation, in turn, establishes a useful parallel between our model and a class of games with incomplete information and linear best responses analyzed, among others, by Morris and Shin (2002) and Pavan (2007, 2009 higher-order beliefs, and so on.…”