Inflation and Output Volatility Under Asymmetric Incomplete Information

30 Pages Posted: 18 Sep 2009

See all articles by Giacomo Carboni

Giacomo Carboni

European Central Bank (ECB)

Martin Ellison

University of Oxford

Date Written: September 17, 2009

Abstract

The assumption of asymmetric and incomplete information in a standard New Keynesian model creates strong incentives for monetary policy transparency. We assume that the central bank has better information about its objectives than the private sector, and that the private sector has better information about shocks than the central bank. Transparency has the potential to trigger a virtuous circle in which all agents find it easier to make inferences and the economy is better stabilised. Our analysis improves upon existing work by endogenising the volatility of both output and inflation. Improved transparency most likely manifests itself in falling output volatility.

Keywords: imperfect credibility, asymmetric information, signal extraction

JEL Classification: E32, E37, E52

Suggested Citation

Carboni, Giacomo and Ellison, Martin, Inflation and Output Volatility Under Asymmetric Incomplete Information (September 17, 2009). ECB Working Paper No. 1092. Available at SSRN: https://ssrn.com/abstract=1473765

Giacomo Carboni (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Martin Ellison

University of Oxford ( email )

Manor Road Building
Manor Road
Oxford, OX1 3BJ
United Kingdom

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