The reception of public signals in financial marketswhat if central bank communication becomes stale?

How do financial markets price new information? This paper analyzes price setting atthe intersection of private and public information, by testing whether and how thereaction of financial markets to public signals depends on the relative importance ofprivate information in agents’ information sets at a given point in time. It studies thereaction of UK short-term interest rates to the Bank of England’s inflation report andto macroeconomic announcements. Due to the quarterly frequency at which the Bankof England releases one of its main publications, it can become stale over time. In thecourse of this process, financial market participants need to rely more on privateinformation. The paper develops a stylized model which predicts that, the more timehas elapsed since the latest release of an inflation report, market volatility shouldincrease, the price response to macroeconomic announcements...