Imperfect Transparency and Shifts in the Central Bank's Output Gap Target
In the New Keynesian framework, the public's expectation about the future path of monetary policy is an important determinant of current economic conditions. This paper examines the impact of unobservable shifts in the central bank's output gap target on inflation and output dynamics. I show that when the degree of persistence of a shock is private information of the central bank, and policy is discretionary in nature, it is optimal for the central bank not to reveal the future expected path of the output gap target. Perfect transparency unambiguously increases inflation and output volatility and thus lowers welfare.
|Date of creation:||2006|
|Date of revision:||2008|
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- Bennett T. McCallum & Edward Nelson, 2000.
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NBER Working Papers
7915, National Bureau of Economic Research, Inc.
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- Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
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"A Timeless Perspective on Optimality in Forward-Looking Rational Expectations Models,"
NIESR Discussion Papers
154, National Institute of Economic and Social Research.
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