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Author Baeriswyl, Romain ♦ Cornand, Camille
Source CiteSeerX
Content type Text
File Format PDF
Subject Domain (in DDC) Computer science, information & general works ♦ Data processing & computer science
Subject Keyword Monetary Policy ♦ Central Bank ♦ Mark-up Shock ♦ Informative Value ♦ Optimal Monetary Policy ♦ Financial Support ♦ Public Signal ♦ Current Context ♦ U.k. Esrc ♦ Relative Low Sensitivity ♦ Second Author ♦ Precise Private Information ♦ Various Stage ♦ Helpful Feedback ♦ Economic Transparency ♦ Strategic Complementarity ♦ Carl Walsh ♦ Inflationary Bias ♦ Welfare Effect ♦ Information Purpose ♦ Inclined Towards Price Stabilization ♦ Monopolistic Competition ♦ Central Bank Signal ♦ Price Stability ♦ Frank Heinemann ♦ Gerhard Illing ♦ Optimal Central Bank Disclosure ♦ Dual Role ♦ Imperfect Common Knowledge ♦ Hyun Shin ♦ Demand Shock ♦ Central Bank Assessment ♦ Strong Central Bank ♦ Central Bank Information
Abstract This paper analyzes the welfare effects of economic transparency in the con-duct of monetary policy. We propose a model of monopolistic competition with imperfect common knowledge on the shocks affecting the economy where the central bank has no inflationary bias. In this context, monetary policy entails a dual role. The instrument of the central bank is both an action that stabi-lizes the economy and a public signal that partially reveals to firms the central bank’s assessment about the state of the economy. Yet, firms are unable to perfectly disentangle the central bank’s signals responsible for the instrument and the central bank optimally balances the action and information purposes of its instrument. We derive the optimal monetary policy and the optimal central bank’s disclosure. We define transparency as an announcement by the central bank that allows firms to identify the rationale behind the instrument. It turns out that transparency is welfare increasing (i) when the degree of strategic complementarities is low, (ii) when the economy is not too affected by mark-up shocks, (iii) when the central bank is more inclined towards price stabilization, (iv) when firms have relatively precise private information, and (v) when the ∗We thank Frank Heinemann, Gerhard Illing, Hyun Shin and Carl Walsh for helpful feedbacks at various stages of the project. The second author gratefully acknowledges financial support from the U.K. ESRC and thanks the FMG for hospitality. Remaining errors are the authors ’ own. central bank’s information is relatively precise on demand shocks and relatively imprecise on mark-up shocks. These results rationalize the increase in trans-parency in the current context of relative low sensitivity of the economy to mark-up shocks and of strong central bank’s preference for price stability.
Educational Role Student ♦ Teacher
Age Range above 22 year
Educational Use Research
Education Level UG and PG ♦ Career/Technical Study
Learning Resource Type Article