Central bank communication and crowding out of private information in an experimental asset market

Abstract

Theoretical results from previous work, presented in Kool, Middeldorp and Rosenkranz (2007), suggest that central bank communication crowds out private information acquisition and that this effect can lead to a deterioration of the ability of financial markets to predict future policy interest rates. We examine this result in an experimental asset market that closely follows the theoretical model. Crowding out of information acquisition takes place and, where this crowding out is most rapid, there is deterioration of the market’s predictive ability. This supports the theoretical result that central bank communication can actually make it more difficult for financial markets to predict future policy rates.