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The signaling role of policy action

  • Romain Baeriswyl
  • Camille Cornand
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    This paper analyzes the conduct of the optimal monetary policy with imperfect information on the shocks hitting the economy where firms’ prices are strategic complements. Monetary policy entails a dual stabilizing role, as a policy response that influences directly the economy and as a vehicle for information that shapes firms’ beliefs. In the case where more information is welfare detrimental, the central bank faces a dilemma, for its monetary instrument aimed at stabilizing the economy may harmfully shape firms’ beliefs. Recognizing the signaling role of its instrument, the central bank finds it optimal to distort its policy response in order to mitigate the detrimental information that it may convey.

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    File URL: http://www.beta-umr7522.fr/productions/publications/2010/2010-04.pdf
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    Paper provided by Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg in its series Working Papers of BETA with number 2010-04.

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    Date of creation: 2010
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    Handle: RePEc:ulp:sbbeta:2010-04
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    1. Klaus Adam, 2003. "Optimal Monetary Policy with Imperfect Common Knowledge," Computing in Economics and Finance 2003 263, Society for Computational Economics.
    2. George-Marios Angeletos & Alessandro Pavan, 2007. "Efficient Use of Information and Social Value of Information," Econometrica, Econometric Society, vol. 75(4), pages 1103-1142, 07.
    3. George-Marios Angeletos & Christian Hellwig & Alessandro Pavan, 2005. "Signaling in a Global Game: Coordination and Policy Traps," Discussion Papers 1400, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
    4. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
    5. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
    6. Aleh Tsyvinski & Arijit Mukherji & Christian Hellwig, 2006. "Self-Fulfilling Currency Crises: The Role of Interest Rates," American Economic Review, American Economic Association, vol. 96(5), pages 1769-1787, December.
    7. N. Gregory Mankiw & Ricardo Reis, 2001. "Sticky information versus sticky prices: a proposal to replace the New-Keynesian Phillips curve," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
    8. Christian Hellwig, 2002. "Public Announcements, Adjustment Delays, and the Business Cycle (November 2002)," UCLA Economics Online Papers 208, UCLA Department of Economics.
    9. Carl E. Walsh, 2007. "Optimal Economic Transparency," International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 5-36, March.
    10. David H. Romer & Christina D. Romer, 2000. "Federal Reserve Information and the Behavior of Interest Rates," American Economic Review, American Economic Association, vol. 90(3), pages 429-457, June.
    11. Christian Hellwig, 2004. "Heterogeneous Information and the Benefits of Public Information Disclosures (October 2005)," UCLA Economics Online Papers 283, UCLA Department of Economics.
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