News Management in Monetary Policy : Why Central Banks Lie to the Government

The literature on central banking so far has provided explanations of why we observe independent central banks and why central banks are usually more conservative than governments. However, little is known about the interaction between the two institutions. Bridging the gap, we focus on the central bank's strategic news management towards the government when the central bank has private (but incomplete) information on the state of the economy. A central bank that is better informed than the government can exploit this asymmetry to carry out a low inflation policy without facing government intervention. Strategic news management in the sense of withholding information is an equilibrium. A simple extension of our findings is that, if the government occasionally learns about the central bank's true information, it actually does overrule the central bank's decision on monetary policy. This might help to explain some real-world conflicts between central banks and governments