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Aggregate shock and monetary policy regimes

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  • Rhee, Hyuk-jae
  • Turdaliev, Nurlan
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    Abstract

    We study monetary policy transparency with regard to publication of central bank forecasts of the future state of the economy in the New Keynesian framework. The central bank has private information about the future aggregate shock. We compare two possible monetary policy regimes, transparent and opaque. The ex-ante welfare level is higher under the opaque regime, in which the central bank does not release its forecast. This is due to smoother consumption over the business cycle. We demonstrate that the welfare difference between the two regimes increases with the degree of monopoly power in the intermediate sector. In particular, the welfare difference vanishes when the intermediate sector is perfectly competitive. We also show that the welfare difference increases with the accuracy of information possessed by the central bank, and the welfare difference disappears when the central bank has no information advantage over the private sector about the economy. And, finally, we establish that the welfare difference increases with the level of shock fluctuations.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Macroeconomics.

    Volume (Year): 32 (2010)
    Issue (Month): 1 (March)
    Pages: 201-217

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    Handle: RePEc:eee:jmacro:v:32:y:2010:i:1:p:201-217

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    Web page: http://www.elsevier.com/locate/inca/622617

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    Keywords: Monetary policy Transparency Central bank;

    References

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    1. Ireland, Peter N, 1996. "The Role of Countercyclical Monetary Policy," Journal of Political Economy, University of Chicago Press, vol. 104(4), pages 704-23, August.
    2. Eijffinger, Sylvester C W & Tesfaselassie, Mewael F., 2005. "Central Bank Forecasts and Disclosure Policy: Why it Pays to be Optimistic," CEPR Discussion Papers 4854, C.E.P.R. Discussion Papers.
    3. Faust, J. & Svensson, L.E.O., 1998. "Transparency and Credibility: Monetary Policy with Unobservable Goals," Papers 636, Stockholm - International Economic Studies.
    4. Jensen, Henrik, 2001. "Optimal degrees of transparency in monetary policymaking," Discussion Paper Series 1: Economic Studies 2001,04, Deutsche Bundesbank, Research Centre.
    5. David H. Romer & Christina D. Romer, 2000. "Federal Reserve Information and the Behavior of Interest Rates," American Economic Review, American Economic Association, vol. 90(3), pages 429-457, June.
    6. Maria Demertzis & Andrew Hughes Hallet, 2003. "Central Bank Transparency in Theory and Practice," DNB Staff Reports (discontinued) 105, Netherlands Central Bank.
    7. Jinill Kim and Sunghyun Henry Kim, 2001. "Spurious Welfare Reversals in International Business Cycle Models," Computing in Economics and Finance 2001 3, Society for Computational Economics.
    8. Chari, V. V. & Christiano, Lawrence J. & Eichenbaum, Martin, 1998. "Expectation Traps and Discretion," Journal of Economic Theory, Elsevier, vol. 81(2), pages 462-492, August.
    9. Dotsey, Michael & Ireland, Peter, 1995. "Liquidity Effects and Transactions Technologies," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(4), pages 1441-57, November.
    10. Geraats, P.M., 2004. "Transparency and Reputation: The Publication of Central Bank Forecasts," Cambridge Working Papers in Economics 0473, Faculty of Economics, University of Cambridge.
    11. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
    12. Frederic S Mishkin, 2004. "Can Central Bank Transparency Go Too Far?," RBA Annual Conference Volume, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.
    13. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
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    Cited by:
    1. Meixing Dai & Moïse Sidiropoulos & Eleftherios Spyromitros, 2014. "Fiscal policy, institutional quality and central bank transparency," Working Papers of BETA 2014-04, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.
    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. Marcelo Sánchez, 2012. "Structural Reform and Transparency in a Monetary Union," Open Economies Review, Springer, vol. 23(3), pages 559-577, July.

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