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Inflation and output volatility under asymmetric incomplete information

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Author Info
Giacomo Carboni () (European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany.)
Martin Ellison () (Department of Economics, University of Oxford, Manor Road Building, Oxford, OX1 2UQ, United Kingdom.)

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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. JEL Classification: E32, E37, E52.

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Paper provided by European Central Bank in its series Working Paper Series with number 1092.

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Length: 30 pages
Date of creation: Sep 2009
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Handle: RePEc:ecb:ecbwps:20091092

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Related research
Keywords: Imperfect credibility; Asymmetric information; Signal extraction.;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Dieter Gerdesmeier & Barbara Roffia & Hans-Eggert Reimers, 2009. "Asset price misalignments and the role of money and credit," Working Paper Series 1068, European Central Bank. [Downloadable!]
  2. Luca Agnello & Ludger Schuknecht, 2009. "Booms and busts in housing markets - determinants and implications," Working Paper Series 1071, European Central Bank. [Downloadable!]
  3. Jan Marc Berk & Beata K. Bierut, 2009. "Monetary Policy Committees - meetings and outcomes," Working Paper Series 1070, European Central Bank. [Downloadable!]
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  4. Campbell Leith & Ioana Moldovan & Raffaele Rossi, 2009. "Optimal Monetary Policy in a New Keynesian Model with Habits in Consumption," Working Paper Series 1076, European Central Bank. [Downloadable!]
    Other versions:
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This page was last updated on 2009-12-1.

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