The Return of Greenspan: Mumbling with Great Incoherence

Abstract

Conventional wisdom regards a reduced aggregate noise as welfare improving. This study demonstrates that increased transparency regarding the unobserved state of the economy may reduce social welfare owing to the presence of nominal rigidity. On the one hand, costly business cycle fluctuations and price dispersions arising from nominal rigidity are muted in a noisy economy. On the other hand, an economy with less transparency suffers from efficiency losses due to inefficient coordination in pricing decisions. Monetary policy affects the tradeoff, and thus interacts with communication policy. We characterize the conditions under which more transparency reduces social welfare.

Keywords: Central Bank Communication, Sticky Prices, Dispersed Information, Informa- tion Frictions, Monetary Policy

JEL Classification: E31, E32, E52, E58