Central bank communications risk circularity, says BIS paper
Policy communications influence market prices and market prices influence policy
Central banks risk becoming trapped in a loop between their policy communications and market prices, a working paper published by the Bank for International Settlements argues.
Stephen Morris and Hyun Song Shin say this “reflection problem” emerges when market participants place too much weight on correctly guessing central bank actions, and not enough on broader factors that might affect markets. In turn, if a central bank “places faith” in markets as a guide to monetary policy actions, “it
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