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Optimal Monetary Policy when Information is Market-Generated

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  • Benhima, Kenza
  • Blengini, Isabella

Abstract

The nature of the private sector's information changes the optimal conduct of monetary policy. When firms observe their individual demand and use it as a signal of real shocks, the optimal policy consists in maximizing the information content of that signal. When real shocks are deflationary (like labor supply shocks), the optimal policy is countercyclical and magnifies price movements, which contrasts with the exogenous information case, where optimal monetary policy is procyclical and stabilizes prices. When the central bank communicates its information to the public, this policy is still optimal if firms pay limited attention to central bank announcements.

Suggested Citation

  • Benhima, Kenza & Blengini, Isabella, 2019. "Optimal Monetary Policy when Information is Market-Generated," CEPR Discussion Papers 13817, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:13817
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    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    central bank communication; endogenous information; Expectations; Information Frictions; Optimal monetary policy;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements

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