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Inflation and output volatility under asymmetric incomplete information

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  • Carboni, Giacomo
  • Ellison, Martin

Abstract

The assumption of asymmetric and incomplete information in a standard New Keynesian model creates strong incentives for monetary policy transparency. We assume that the central bank has better information about its objectives than the private sector, and that the private sector has better information about shocks than the central bank. Transparency has the potential to trigger a virtuous circle in which all agents find it easier to make inferences and the economy is better stabilised. Our analysis improves upon existing work by endogenising the volatility of both output and inflation. Improved transparency most likely manifests itself in falling output volatility.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

Volume (Year): 35 (2011)
Issue (Month): 1 (January)
Pages: 40-51

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Handle: RePEc:eee:dyncon:v:35:y:2011:i:1:p:40-51

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Web page: http://www.elsevier.com/locate/jedc

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Keywords: Imperfect credibility Asymmetric information Signal extraction;

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Cited by:
  1. Julian A. Parra-Polania, 2012. "Transparency: can central banks commit to truthful communication?," BORRADORES DE ECONOMIA 009614, BANCO DE LA REPÚBLICA.
  2. Rhee, Hyuk Jae & Turdaliev, Nurlan, 2013. "Central bank transparency: Does it matter?," International Review of Economics & Finance, Elsevier, vol. 27(C), pages 183-197.
  3. Anna Loleyt & Ilya Gurov, 2011. "The process of formation of inflation expectations in an information economy," IFC Bulletins chapters, in: Bank for International Settlements (ed.), Proceedings of the IFC Conference on "Initiatives to address data gaps revealed by the financial crisis", Basel, 25-26 August 2010, volume 34, pages 104-127 Bank for International Settlements.

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