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Optimal Monetary Policy and Transparency under Informational Friction

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  • Wataru Tamura

    (The University of Tokyo)

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    Abstract

    This paper examines optimal monetary policy and central bank transparency in an economy where firms set prices under informational frictions. The economy modeled in this paper is subject to two types of shocks that determine the efficient level of output and firms’ desired mark-ups. To minimize the welfare-reducing output gap and price dispersion among firms, the central bank controls firms’ incentives and expectations by using a monetary instrument and by disclosing information on the fundamentals. This paper shows that the optimal policy comprises the partial disclosure of information and the adjustment of the monetary instrument contingent on the disclosed information. Under this optimal policy, public information is formed by the weighted difference of the two shocks in order to induce a negative correlation between their conditional expectations, while monetary policy should offset the detrimental effect of such a disclosure policy on price stabilization.

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    File URL: http://www.carf.e.u-tokyo.ac.jp/pdf/workingpaper/fseries/F329.pdf
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    Bibliographic Info

    Paper provided by Center for Advanced Research in Finance, Faculty of Economics, The University of Tokyo in its series CARF F-Series with number CARF-F-329.

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    Length: 29 pages
    Date of creation: Oct 2013
    Date of revision:
    Handle: RePEc:cfi:fseres:cf329

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    1. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Working Papers 1038, Princeton University, Department of Economics, Center for Economic Policy Studies..
    2. Klaus Adam, 2003. "Optimal Monetary Policy with Imperfect Common Knowledge," Computing in Economics and Finance 2003 263, Society for Computational Economics.
    3. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    4. Svensson, Lars E.O. & Faust, John, 1998. "Transparency and Credibility: Monetary Policy with Unobservable Goals," Seminar Papers 636, Stockholm University, Institute for International Economic Studies.
    5. Stephen Morris & Hyun Song Shin, 2007. "Optimal Communication," Journal of the European Economic Association, MIT Press, vol. 5(2-3), pages 594-602, 04-05.
    6. Emir Kamenica & Matthew Gentzkow, 2011. "Bayesian Persuasion," American Economic Review, American Economic Association, vol. 101(6), pages 2590-2615, October.
    7. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
    8. Gersbach, Hans & Hahn, Volker, 2008. "Monetary Policy Inclinations," CEPR Discussion Papers 6761, C.E.P.R. Discussion Papers.
    9. Baeriswyl, Romain & Cornand, Camille, 2010. "The signaling role of policy actions," Journal of Monetary Economics, Elsevier, vol. 57(6), pages 682-695, September.
    10. Volker Hahn, 2012. "Should central banks remain silent about their private information on cost-push shocks?," Oxford Economic Papers, Oxford University Press, vol. 64(4), pages 593-615, October.
    11. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, vol. 50(3), pages 665-690, April.
    12. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
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