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The signaling role of policy actions

  • Baeriswyl, Romain
  • Cornand, Camille

In an economy affected by shocks that are imperfectly known, the monetary instrument takes on a dual stabilizing role: as a policy response that directly influences the economy and as a vehicle for information that reveals the central bank's assessment to firms. Because mark-up shocks cannot be neutralized by monetary policy, providing firms with more information about these shocks exacerbates their reaction and creates a larger distortion. Recognizing the signaling role of its instrument, the central bank distorts its policy response in order to optimally shape firms' beliefs. While providing firms with more information is always detrimental to the output gap, it has a more subtle effect on price dispersion depending on whether information is provided through the transparency channel or through the signaling channel. Although more transparency is always detrimental to welfare, the information that is conveyed by the monetary instrument improves welfare when firms' coordination is highly valuable.

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Article provided by Elsevier in its journal Journal of Monetary Economics.

Volume (Year): 57 (2010)
Issue (Month): 6 (September)
Pages: 682-695

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Handle: RePEc:eee:moneco:v:57:y:2010:i:6:p:682-695
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505566

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  1. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2006. "Signaling in a Global Game: Coordination and Policy Traps," Journal of Political Economy, University of Chicago Press, vol. 114(3), pages 452-484, June.
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  7. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  8. Carl E. Walsh, 2007. "Optimal Economic Transparency," International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 5-36, March.
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