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Optimal information acquisition and monetary policy

  • Cone, Thomas E.

I study optimal monetary policy with an expectational AS curve and private agents who optimally choose their amount of information pertinent to predicting policy. Shocks with time-varying variance (ARCH) induce interesting information acquisition (IA) dynamics; optimal IA affects optimal policy and vice versa. Under discretion, IA dynamics cause time-varying effectiveness of policy because of the expectational AS curve; policy may be rendered completely ineffective. In policy game equilibrium, a fall in the shock's variance typically induces less IA and raises welfare. In one exceptional case the opposite occurs, a result which does not require implausible unstable equilibria. An agent becoming informed increases the endogenous component of economic volatility; IA therefore has a negative externality. Under commitment policy's effectiveness is again time-varying, but policy is never completely ineffective: commitment enables the central bank to credibly limit policy's volatility; this limits private agents' incentive to become informed, so limits expectation-induced policy neutrality.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 30 (2008)
Issue (Month): 4 (December)
Pages: 1370-1389

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Handle: RePEc:eee:jmacro:v:30:y:2008:i:4:p:1370-1389
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