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Imperfect information, multiple shocks, and policy's signaling role

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  • Berkelmans, Leon

Abstract

In multiple shock models, when agents have imperfect information they attempt to infer a shock's type, in addition to its size. In this environment, monetary policy plays an important signaling role. This paper highlights this signaling role by showing that conclusions from imperfect information monetary models are sensitive to the number of shocks included. With multiple shocks, contractionary monetary policy can initially increase inflation and delay the eventual disinflation. Moreover, multiple shocks can result in destabilizing price flexibility, while optimal policy's response to one shock will depend on the existence of other shocks, contrary to a typical linear-quadratic framework.

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  • Berkelmans, Leon, 2011. "Imperfect information, multiple shocks, and policy's signaling role," Journal of Monetary Economics, Elsevier, vol. 58(4), pages 373-386.
  • Handle: RePEc:eee:moneco:v:58:y:2011:i:4:p:373-386
    DOI: 10.1016/j.jmoneco.2011.07.002
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    Cited by:

    1. Tang, Jenny, 2013. "Uncertainty and the signaling channel of monetary policy," Working Papers 15-8, Federal Reserve Bank of Boston, revised 29 Apr 2015.
    2. Jan Filacek & Jakub Mateju, 2014. "Adverse Effects of Monetary Policy Signalling," Working Papers 2014/13, Czech National Bank, Research Department.
    3. Isabella Blengini & Kenza Benhima, 2016. "Optimal Monetary Policy when Information is Market-Generated," 2016 Meeting Papers 1223, Society for Economic Dynamics.

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