Optimal Monetary Policy and Transparency under Informational Frictions
26 Pages Posted: 20 Dec 2012 Last revised: 10 Feb 2016
Date Written: February 10, 2016
This paper examines the optimal monetary policy and central bank transparency in an economy where firms set prices under informational frictions. The economy is subject to two types of shocks determining the efficient output level and firms' desired mark-ups. To minimize the welfare-reducing output gap and price dispersion between firms, the central bank controls firms' incentives and expectations by using a monetary instrument and disclosing information on the realized shocks. This paper shows that an optimal policy comprises the disclosure of a linear combination of the two shocks and the adjustment of monetary instruments contingent on the disclosed information.
Keywords: optimal monetary policy, disclosure policy, policy signaling, informational frictions
JEL Classification: E31, E52, D83
Suggested Citation: Suggested Citation