Here.
The experiment highlights the role of information acquisition in the reaction of participants to public disclosures. This finding provides some insight into the so-called forward guidance puzzle documented by Del Negro et al. (2015), which refers to the surprisingly weak reaction of market participants to central banks’ disclosures about the banks’ intended future policy compared to the reactions predicted theoretically in standard new Keynesian models. Shaping market expectations seems more challenging in practice than in theory. Angeletos and Lian (2018) propose the lack of common knowledge and Garcia Schmidt and Woodford (2018) the limited level of reasoning as possible causes of this puzzle. Both hypotheses are supported by our experiment: a limited level of reasoning explains weak attention to the most common and least private signal; this weak attention then prevents the emergence of common knowledge among participants. Moreover, given their information, participants typically deploy a limited level of reasoning in choosing their action.
From:
Romain Baeriswyl
Kene Boun My
Camille Cornand
The experiment highlights the role of information acquisition in the reaction of participants to public disclosures. This finding provides some insight into the so-called forward guidance puzzle documented by Del Negro et al. (2015), which refers to the surprisingly weak reaction of market participants to central banks’ disclosures about the banks’ intended future policy compared to the reactions predicted theoretically in standard new Keynesian models. Shaping market expectations seems more challenging in practice than in theory. Angeletos and Lian (2018) propose the lack of common knowledge and Garcia Schmidt and Woodford (2018) the limited level of reasoning as possible causes of this puzzle. Both hypotheses are supported by our experiment: a limited level of reasoning explains weak attention to the most common and least private signal; this weak attention then prevents the emergence of common knowledge among participants. Moreover, given their information, participants typically deploy a limited level of reasoning in choosing their action.
From:
Romain Baeriswyl
Kene Boun My
Camille Cornand