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Aggregate shock and monetary policy regimes

  • Rhee, Hyuk-jae
  • Turdaliev, Nurlan

We study monetary policy transparency with regard to publication of central bank forecasts of the future state of the economy in the New Keynesian framework. The central bank has private information about the future aggregate shock. We compare two possible monetary policy regimes, transparent and opaque. The ex-ante welfare level is higher under the opaque regime, in which the central bank does not release its forecast. This is due to smoother consumption over the business cycle. We demonstrate that the welfare difference between the two regimes increases with the degree of monopoly power in the intermediate sector. In particular, the welfare difference vanishes when the intermediate sector is perfectly competitive. We also show that the welfare difference increases with the accuracy of information possessed by the central bank, and the welfare difference disappears when the central bank has no information advantage over the private sector about the economy. And, finally, we establish that the welfare difference increases with the level of shock fluctuations.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 32 (2010)
Issue (Month): 1 (March)
Pages: 201-217

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Handle: RePEc:eee:jmacro:v:32:y:2010:i:1:p:201-217
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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  1. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
  2. Geraats Petra M., 2005. "Transparency and Reputation: The Publication of Central Bank Forecasts," The B.E. Journal of Macroeconomics, De Gruyter, vol. 5(1), pages 1-28, February.
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  8. Svensson, Lars E.O. & Faust, John, 1998. "Transparency and Credibility: Monetary Policy with Unobservable Goals," Seminar Papers 636, Stockholm University, Institute for International Economic Studies.
  9. Jensen, Henrik, 2001. "Optimal degrees of transparency in monetary policymaking," Discussion Paper Series 1: Economic Studies 2001,04, Deutsche Bundesbank, Research Centre.
  10. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
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  12. Frederic S Mishkin, 2004. "Can Central Bank Transparency Go Too Far?," RBA Annual Conference Volume, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.
  13. David H. Romer & Christina D. Romer, 2000. "Federal Reserve Information and the Behavior of Interest Rates," American Economic Review, American Economic Association, vol. 90(3), pages 429-457, June.
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