The signal extraction problem results in the federal funds rate being less sensitive to the current level of reserves. Central bank concern for the level of interest rates can induce it to consistently set total reserves above its current reserve target. Secrecy, by reducing the sensitivity of the interest rate to the current level of reserves, lowers the marginal interest rate cost of moving towards the central bank's reserve target and, hence, lowers the upward bias in total reserves. Consequently, the central bank prefers secrecy to disclosure. In this analysis, the Trading Desk values secrecy because it reduces the influence of its monetary control policy on interest rates.
Conventional wisdom holds that the welfare of commercial banks is lowered by central bank secrecy.
The influence of central bank secrecy on the variability and predictability of interest rates is a common object of analysis. A standard result is that secrecy reduces the predictability of interest rates. Given the choice-theoretic framework of this paper, it is possible to examine the conjecture that central bank secrecy lowers the value of commercial banks. In general, it is not possible to order the relative value of commercial banks under the alternative information regimes. The information regime influences the value of commercial banks through two channels.