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Transparency and Monetary Policy Effectiveness

Author

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  • Romain Baeriswyl
  • Camille Cornand

Abstract

This article analyses the effects of economic transparency on the optimal monetary policy in an economy affected by demand shocks. In an environment of imperfect common knowledge, demand shocks create a trade-off between stabilizing the price level and stabilizing the output gap. The monetary policy implemented by the central bank tends, on the one hand, to offset demand shocks but, on the other hand, to distort the economy because of its mistaken view of the fundamental state of the economy. Transparency is optimal as long as the central bank does not weight the stabilization of the output gap too heavily in its objective function.

Suggested Citation

  • Romain Baeriswyl & Camille Cornand, 2011. "Transparency and Monetary Policy Effectiveness," Annals of Economics and Statistics, GENES, issue 103-104, pages 175-194.
  • Handle: RePEc:adr:anecst:y:2011:i:103-104:p:175-194
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    File URL: http://www.jstor.org/stable/41615498
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    Cited by:

    1. repec:mbr:jmonec:v:9:y:2014:i:3:p:31-57 is not listed on IDEAS
    2. Myatt, David P. & Wallace, Chris, 2014. "Central bank communication design in a Lucas-Phelps economy," Journal of Monetary Economics, Elsevier, vol. 63(C), pages 64-79.
    3. Myatt, David P. & Wallace, Chris, 2015. "Cournot competition and the social value of information," Journal of Economic Theory, Elsevier, vol. 158(PB), pages 466-506.

    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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