Using a simple microfounded macroeconomic model with price making firms and a central bank
maximizing the welfare of a representative household, it is shown that the presence of firms’ motivated
beliefs has stark consequences for the conduct of optimal communication and stabilization policies.
Under pure communication (resp. communication and stabilization policies), motivated beliefs about
own private information (resp. own ability to process information) may reverse the bang-bang
solution of transparency (resp. opacity with full stabilization) found in the literature under objective
beliefs and lead to intermediate levels of communication (and stabilization).

The literature identifies good and bad economic effects of bank competition, usually linked to the lower/higher degree of `implicit' credit rationing or higher/lower risk of bank failure. In this work we highlight a different economic effect of (im)perfect competition in the banking sector, namely its influence on fluctuations in banking activity and output linked to autonomous volatility in self-fulfilling expectations. We consider an OLG model with two types of households: lenders who consume and work when young and save through bank deposits to finance consumption in old age; and entrepreneurs who ask for a bank loan to finance current consumption and to invest in a productive project that will pay for their second period consumption. Banks pay a fee to have a license to operate, face a reserve requirement rate fixed by the monetary authority and solve a profits maximation problem every period under Cournot competition with free entry and exit. We find that more competition in the banking sector facilitates the emergence of local indeterminacy and sunspots fluctuations, promoting therefore macroeconomic instability.