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Volatile Policy and Private Information: The Case of Monetary Policy

  • Larry E. Jones
  • Rodolfo E. Manuelli

In this paper we study how volatility in monetary policy affects economic performance in the presence of endogenously chosen information structures. To isolate the effects produced by the interaction of uncertainty in monetary policy and (possibly) asymmetric information, we consider a model in which in the absence of either one of these features the equilibrium would be efficient. The equilibria that we find, with volatility and asymmetry of information, are inefficient for two reasons: first, in some cases, economic agents fail to trade, even though it is always efficient to do so; second, to capture the rents associated with being informed, agents spend resources acquiring socially useless information. Thus, in addition to the more standard effects of volatile inflation, our model calls attention to two types of costs associated with monetary uncertainty: the cost of not trading, and the cost of allocating resources to wasteful activities. The model implies that if monetary policy is not volatile all agents are symmetrically informed and hence, the outcome is efficient. Alternatively, making policy transparent,' i.e guaranteeing that all agents share the same information, serves the same purpose.

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File URL: http://www.nber.org/papers/w7072.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7072.

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Date of creation: Apr 1999
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Publication status: published as Jones, Larry E. and Rodolfo E. Manuelli. "Volatile Policy And Private Information: The Case Of Monetary Shocks," Journal of Economic Theory, 2001, v99(1/2,Jul/Aug), 265-326.
Handle: RePEc:nbr:nberwo:7072
Note: EFG
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  1. Gomme, P., 1993. "Money and Growth Revisited : Measuring the Costs of Inflation in an Endogenous Growth Model," Discussion Papers dp93-03, Department of Economics, Simon Fraser University.
  2. Roubini, Nouriel & Sala-i-Martin, Xavier, 1995. "A growth model of inflation, tax evasion, and financial repression," Journal of Monetary Economics, Elsevier, vol. 35(2), pages 275-301, April.
  3. Lach, Saul & Tsiddon, Daniel, 1992. "The Behavior of Prices and Inflation: An Empirical Analysis of Disaggregated Price Data," Journal of Political Economy, University of Chicago Press, vol. 100(2), pages 349-89, April.
  4. Paul Gomme, 1991. "Money and growth revisited," Discussion Paper / Institute for Empirical Macroeconomics 55, Federal Reserve Bank of Minneapolis.
  5. Samuelson, William F, 1984. "Bargaining under Asymmetric Information," Econometrica, Econometric Society, vol. 52(4), pages 995-1005, July.
  6. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  7. Michael Dotsey & Pierre-Daniel Sarte, 1997. "Inflation uncertainty and growth in a simple monetary model," Working Paper 97-05, Federal Reserve Bank of Richmond.
  8. Cooley, T.F. & Hansen, G.D., 1988. "The Inflation Tax In A Real Business Cycle Model," Papers 88-05, Rochester, Business - General.
  9. Mariano Tommasi, 1992. "Inflation and Relative Prices Evidence from Argentina," UCLA Economics Working Papers 661, UCLA Department of Economics.
  10. Sheshinski, Eytan & Weiss, Yoram, 1977. "Inflation and Costs of Price Adjustment," Review of Economic Studies, Wiley Blackwell, vol. 44(2), pages 287-303, June.
  11. Robert E. Lucas, Jr. & Michael Woodford, 1993. "Real Effects of Monetary Shocks in an Economy with Sequential Purchases," NBER Working Papers 4250, National Bureau of Economic Research, Inc.
  12. V.V. Chari & Larry E. Jones & Rodolfo E. Manuelli, 1995. "The growth effects of monetary policy," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall, pages 18-32.
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