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We present a simple model to characterise central bank forward guidance, large‐scale asset purchases and yield curve control. Endogenous yield curve reactions to policy shocks are a key determinant of monetary conditions and can support or offset policy intentions. Alternative monetary policy tools allow the central bank to signal central bank private information to investors when the policy rate...
We study the two‐way interaction between central banks and financial markets using a beauty contest framework. The analysis identifies when asset prices reveal useful information about fundamentals and when they reflect back the central bank's pronouncements. In equilibrium, the central bank is overly dependent on financial market signals and the information value of asset prices is diminished. Our...
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