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Information Acquisition by Price-Setters and Monetary Policy

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Abstract

In this paper we examine a model where firms decide on the intensity of information acquisition about shocks. We analyze how the monetary policy framework impacts on the aggregate amount of information collected by firms. We show that it is socially beneficial to delegate monetary policy to a conservative central bank even if there are no incentives to push output above its long-run level. Transparency of central banks about economic shocks has ambiguous e ects on welfare. If an extreme level of opacity is feasible, it represents the social optimum. Otherwise full transparency may be a second-best solution.

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Paper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 07/73.

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Length: 33 pages
Date of creation: Sep 2007
Date of revision:
Handle: RePEc:eth:wpswif:07-73

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Keywords: conservative central banker; optimal monetary policy; information; acquisition; Phillips curve; transparency;

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  1. Faust, J. & Svensson, L.E.O., 1998. "Transparency and Credibility: Monetary Policy with Unobservable Goals," Papers, Stockholm - International Economic Studies 636, Stockholm - International Economic Studies.
  2. Jón Steinsson, 2000. "Optimal monetary policy in an economy with inflation persistence," Economics wp11, Department of Economics, Central bank of Iceland.
  3. Sims, Christopher A., 2003. "Implications of rational inattention," Journal of Monetary Economics, Elsevier, Elsevier, vol. 50(3), pages 665-690, April.
  4. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  5. Hans Gersbach, 2003. "On the negative social value of central banks' knowledge transparency," Economics of Governance, Springer, Springer, vol. 4(2), pages 91-102, 08.
  6. Mark Gertler & Jordi Gali & Richard Clarida, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," Journal of Economic Literature, American Economic Association, vol. 37(4), pages 1661-1707, December.
  7. Richard Clarida & Jordi Gali & Mark Gertler, 2002. "A Simple Framework for International Monetary Policy Analysis," NBER Working Papers 8870, National Bureau of Economic Research, Inc.
  8. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 100(4), pages 1169-89, November.
  9. Laurence Ball & N. Gregory Mankiw & Ricardo Reis, 2003. "Monetary Policy for Inattentive Economies," Harvard Institute of Economic Research Working Papers 1997, Harvard - Institute of Economic Research.
  10. Goodfriend, Marvin, 1986. "Monetary mystique: Secrecy and central banking," Journal of Monetary Economics, Elsevier, Elsevier, vol. 17(1), pages 63-92, January.
  11. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  12. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 91(4), pages 589-610, August.
  13. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, Econometric Society, vol. 54(5), pages 1099-1128, September.
  14. Walsh, Carl E, 1995. "Optimal Contracts for Central Bankers," American Economic Review, American Economic Association, vol. 85(1), pages 150-67, March.
  15. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 112(483), pages 532-565, November.
  16. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 85(3), pages 473-91, June.
  17. Hamori, Shigeyuki, 1989. " Information Costs, Learning Process and the Effectiveness of Monetary Policy," Scandinavian Journal of Economics, Wiley Blackwell, vol. 91(3), pages 535-46.
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