Should Optimal Discretionary Monetary Policy Look at Money?

Abstract

This paper examines whether monetary indicators are useful in implementing optimal discretionary monetary policy when the policy maker has incomplete information about the environment. We find that money does not contain useful information for the policy maker, if we calibrate the model to the U.S. economy. If money demand were to be appreciably less variable, observations on money could be useful in response to productivity shocks but would be harmful in response to money demand shocks. We provide an incomplete information example where equilibrium welfare declines when the money demand volatility decreases.

Keywords: monetary policy, sticky prices, optimal time-constraint policy, asymmetric incomplete information

JEL Classification: C61, E52, E58