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Public and Private Information in Monetary Policy Models

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  • Hyun Song Shin
  • Jeffery D. Amato

Abstract

We examine the impact of public information in an economy where agents also have diverse private information. Our work builds on seminal contributions by Townsend (1983) and Phelps (1983), and more recently Woodford (2002), which emphasized the importance of higher-order beliefs – that is, beliefs about the beliefs of others – in an environment where agents’ interests are intertwined. Following Woodford, our focus is on the pricing behaviour of monopolistically competitive firms, where the intertwining of interests arises from strategic complementarity in the pricing decisions of firms. In setting prices, firms try to second-guess prices set by their competitors. Our analysis proceeds in two steps. Beginning with a series of simplified examples, we show how differentially informed firms follow pricing rules that suppress their own information, but instead put disproportionately large weight on commonly shared information. For reasonable degrees of strategic complementarity, the aggregate price suffers substantial information loss, and therefore ceases to be an informative signal of the underlying demand and cost conditions. We follow this up by developing a general equilibrium model incorporating households and the central bank. We find that the disproportionate role of public information degrades the informational value of economic outcomes for firms and the policymaker alike, alters the welfare consequences of increased precision of public information and generates distinctive time series characteristics of some macro variables. In part, these results extend a recent finding by Morris and Shin (2002) that increased precision of public information may impair social welfare in a game of second-guessing reminiscent of Keynes's `beauty contest'. Finally, we trace out the welfare implications of different parametrizations of the policy rule, particularly focusing upon the implications of the relative precision of private and public information
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Suggested Citation

  • Hyun Song Shin & Jeffery D. Amato, 2003. "Public and Private Information in Monetary Policy Models," Computing in Economics and Finance 2003 38, Society for Computational Economics.
    • Handle: RePEc:sce:scecf3:38
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    References listed on IDEAS

    as
    1. Charles Bean, 2003. "Asset Prices, Financial Imbalances and Monetary Policy: Are Inflation Targets Enough?," RBA Annual Conference Volume (Discontinued), in: Anthony Richards & Tim Robinson (ed.),Asset Prices and Monetary Policy, Reserve Bank of Australia.
    2. Franklin Allen & Stephen Morris & Hyun Song Shin, 2003. "Beauty Contests, Bubbles and Iterated Expectations in Asset Markets," Cowles Foundation Discussion Papers 1406, Cowles Foundation for Research in Economics, Yale University.
    3. Lars E. O. Svensson & Michael Woodford, 2004. "Implementing Optimal Policy through Inflation-Forecast Targeting," NBER Chapters, in: The Inflation-Targeting Debate, National Bureau of Economic Research, Inc.
    4. Ben S. Bernanke & Julio J. Rotemberg (ed.), 1997. "NBER Macroeconomics Annual 1997," MIT Press Books, The MIT Press, edition 1, volume 1, number 026252242x, December.
    5. Hyun Song Shin & Jeffery D. Amato, 2003. "Public and private information in monetary policy models," BIS Working Papers 138, Bank for International Settlements.
    6. Lars E. O. Svensson, 2003. "What Is Wrong with Taylor Rules? Using Judgment in Monetary Policy through Targeting Rules," Journal of Economic Literature, American Economic Association, vol. 41(2), pages 426-477, June.
    7. Michael Woodford, 1999. "Optimal Monetary Policy Inertia," Manchester School, University of Manchester, vol. 67(s1), pages 1-35.
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    More about this item

    Keywords

    differential information; strategic complementarities; monetary policy; inflation targeting;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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