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I marvel at your ability to shift perspective on obvious things in useful and interesting ways. It's one of the reasons I read this blog.

One response to this issue might be to poll financial market participants about how long in advance to set the rate. But then you run into the same infinite regress of how long in advance to poll them.

It seems like there should be some kind of information theoretic way to calculate the timing that would provide the most information to the market over an infinite period of time.

Brett: Thanks!

The logic of my post leads to the conclusion that the Bank of Canada should eliminate Fixed Announcement Dates, and simply announce an immediate change in the overnight rate on any day as soon as it thinks the data warrant it. Which is what the Bank of Canada used to do, until a few years back. It changed to FADs for 2 reasons: market participants didn't like the uncertainty of never knowing in advance when the Bank was going to make an announcement; doing all the preliminary stuff for deciding what the overnight rate should be is quite a major job for the Bank, that it wouldn't want to do daily (and it felt this would lead to inertia "let's wait a bit"). Plus some data comes in quarterly, though 4 FADs per year seemed a bit too few, so it compromised on 8 (though maybe 12 i.e. monthly, might be better, because some data come in monthly).

When it becomes serious, you have to lie.

Tel: yep, that's another problem with communication, that never arises if you just do it.

Is there a practical difference in your "advance warning by one period" case and the current situation? As soon as the BoC announced that it "would" be changing rates as of 6.5 weeks from now, that information would be instantly priced into the capital markets. Just like it is today when it is priced in immediately.

The practical benefits for the markets in having 8 fixed days per year seem real as compared to random announcements, but I just don't see practical differences between making an announcement today with immediate effect, and an announcement today with "delayed" effect. It would be "delayed" in name only.

PelinoC: I tend to agree. But if you borrow very short, and lend long (like banks do), and if your long assets are illiquid and take time to sell, I wonder if you could make a case (ignoring the case against in my post)?

The purpose of the central bank is to strategically destroy information; this is not a "problem" with communication, it is a key feature.

If they always lied about everything, of course no one would listen. If they never tell lies they have no leverage.

Thus, there's a balance in terms of just the right amount of dishonesty to introduce into any given situation. This is the reason we can never replace the central bank with a simple algorithm... but it is in the central bank's interest to give the appearance that they do operate by a simple algorithm, except when they don't.

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