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Public Information and Monetary Policy

  • Ted Temzelides

    (University of Pittsburgh)

  • Cyril Monnet

    (FRB Philadelphia)

  • Marie Hoerova

    (ECB)

We study the nature of monetary policy in a model where uncertainty can lead to a discrepancy between economic agents' beliefs and true fundamentals. Monetary policy transmits information about fundamentals. The public nature of this information can help agents to coordinate their decisions. This comes at a cost, however, since monetary policy may lead the private sector to coordinate on the wrong fundamentals and it may result in inflation. We discuss conditions under which monetary policy will be unambiguously welfare-improving. We formalize the notion that monetary policy is equivalent to information revelation by the central bank, and offer an information-based (as opposed to the standard liquidity-based) argument for why higher nominal rate hikes occur less frequently than lower ones.

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File URL: https://economicdynamics.org/meetpapers/2008/paper_5.pdf
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Paper provided by Society for Economic Dynamics in its series 2008 Meeting Papers with number 5.

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Date of creation: 2008
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Handle: RePEc:red:sed008:5
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Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/society.htm
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  1. Randall Wright & Guillame Rocheteau, 2003. "Money in Search Equilibrium, in Competitive Equilibrium, and in Competitive Search Equilibrium," Levine's Bibliography 666156000000000302, UCLA Department of Economics.
  2. Iván Werning & George-Marios Angeletos, 2006. "Crises and Prices: Information Aggregation, Multiplicity, and Volatility," American Economic Review, American Economic Association, vol. 96(5), pages 1720-1736, December.
  3. Ricardo Lagos & Randall Wright, 2002. "A unified framework for monetary theory and policy analysis," Working Paper 0211, Federal Reserve Bank of Cleveland.
  4. Stephen Morris & Hyun Song Shin, 2007. "Coordinating Expectations in Monetary Policy," Levine's Bibliography 321307000000000956, UCLA Department of Economics.
  5. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  6. George-Marios Angeletos & Guido Lorenzoni & Alessandro Pavan, 2007. "Wall Street and Silicon Valley: A Delicate Interaction," NBER Working Papers 13475, National Bureau of Economic Research, Inc.
  7. Cass, David & Shell, Karl, 1983. "Do Sunspots Matter?," Journal of Political Economy, University of Chicago Press, vol. 91(2), pages 193-227, April.
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