School of Economics and Finance Seminar Cheap Talk to Multiple Receivers with Implications for Central Bank Communication

Speaker: Dr Diemo Dietrich, Newcastle University

Abstract: We study a model of strategic communication with multiple, mutually dependent receivers. Without payoff externality among receivers, there is no conflict of interests between sender and receivers. With payoff externality, full information revelation cannot be part of a credible communication strategy. To apply this approach to central bank communication, we include a central bank and externalities in, and uncertainty about, production in an otherwise canonical banking model. A novel trade-off arises. By sharing their knowledge about the state of the economy, central banks reduce uncertainty and can thus improve welfare. However, due to externalities banks provide inefficiently much liquidity insurance. As uncertainty about the economy makes banks more cautious and thus mitigates their excess liquidity provision, central banks are better off withholding more detailed information or even all information.