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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.

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File URL: http://econ.hunter.cuny.edu/wp-content/uploads/sites/6/RePEc/papers/HunterEconWP415.pdf
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Paper provided by Hunter College Department of Economics in its series Economics Working Paper Archive at Hunter College with number 415.

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Date of creation: 2006
Date of revision: 2008
Handle: RePEc:htr:hcecon:415
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Web page: http://econ.hunter.cuny.edu/

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  1. Bennett T. McCallum & Edward Nelson, 2000. "Timeless Perspectives vs. Discretionary Monetary Policy In Forward-Looking Models," NBER Working Papers 7915, National Bureau of Economic Research, Inc.
  2. n/a, 2001. "A Timeless Perspective on Optimality in Forward-Looking Rational Expectations Models," NIESR Discussion Papers 154, National Institute of Economic and Social Research.
  3. 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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