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The informational effect of monetary policy and the case for policy commitment

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  • Jia, Chengcheng

Abstract

I study how the informational effect of monetary policy changes the optimal conduct of monetary policy. In my model, the private sector extracts information about unobserved fundamental shocks from the central bank’s interest rate decisions. The central bank optimally changes the informational effect of the interest rate by committing to a state-contingent policy rule, in which case the Phillips curve becomes endogenous. In a dynamic model, the optimal policy rule overshoots the natural-rate shock and gradually responds to the cost-push shock, which makes the interest rate change expected output growth but not expected inflation.

Suggested Citation

  • Jia, Chengcheng, 2023. "The informational effect of monetary policy and the case for policy commitment," European Economic Review, Elsevier, vol. 156(C).
    • Handle: RePEc:eee:eecrev:v:156:y:2023:i:c:s0014292123000971
    DOI: 10.1016/j.euroecorev.2023.104468
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    More about this item

    Keywords

    Monetary policy; Information frictions; Policy commitment;
    All these keywords.

    JEL classification:

    • 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
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations

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