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Optimal Monetary Policy and Transparency under Informational Frictions

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  • WATARU TAMURA

Abstract

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 markups. 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.

Suggested Citation

  • Wataru Tamura, 2016. "Optimal Monetary Policy and Transparency under Informational Frictions," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(6), pages 1293-1314, September.
    • Handle: RePEc:wly:jmoncb:v:48:y:2016:i:6:p:1293-1314
    DOI: 10.1111/jmcb.12334
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    References listed on IDEAS

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    1. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    2. Adam, Klaus, 2007. "Optimal monetary policy with imperfect common knowledge," Journal of Monetary Economics, Elsevier, vol. 54(2), pages 267-301, March.
    3. Jenny Tang, 2013. "Uncertainty and the signaling channel of monetary policy," Working Papers 15-8, Federal Reserve Bank of Boston.
    4. N. Gregory Mankiw & Ricardo Reis, 2002. "Sticky Information versus Sticky Prices: A Proposal to Replace the New Keynesian Phillips Curve," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(4), pages 1295-1328.
    5. George-Marios Angeletos & Luigi Iovino & Jennifer La'O, 2011. "Cycles, Gaps, and the Social Value of Information," Levine's Working Paper Archive 786969000000000293, David K. Levine.
    6. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    7. Mr. Mauro F Roca, 2010. "Transparency and Monetary Policy with Imperfect Common Knowledge," IMF Working Papers 2010/091, International Monetary Fund.
    8. Volker Hahn, 2012. "Should central banks remain silent about their private information on cost-push shocks?," Oxford Economic Papers, Oxford University Press, vol. 64(4), pages 593-615, October.
    9. repec:pri:cepsud:161blinder is not listed on IDEAS
    10. Baeriswyl, Romain & Cornand, Camille, 2010. "The signaling role of policy actions," Journal of Monetary Economics, Elsevier, vol. 57(6), pages 682-695, September.
    11. Hahn, Volker, 2014. "Transparency In Monetary Policy, Signaling, And Heterogeneous Information," Macroeconomic Dynamics, Cambridge University Press, vol. 18(2), pages 369-394, March.
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    Cited by:

    1. Tatsushi Okuday & Tomohiro Tsurugaz & Francesco Zanetti, 2019. "Imperfect Information, Shock Heterogeneity, and Inflation Dynamics," BCAM Working Papers 1906, Birkbeck Centre for Applied Macroeconomics.
    2. Herbert Sylvérie, 2022. "State-dependent Central Bank Communication with Heterogeneous Beliefs," Working papers 875, Banque de France.
    3. Tatsushi Okuda & Tomohiro Tsuruga, 2021. "Inflation Expectations and Central Bank Communication with Unknown Prior," IMES Discussion Paper Series 21-E-07, Institute for Monetary and Economic Studies, Bank of Japan.
    4. Jonathan G. James & Philip Lawler, 2024. "Clarity of Central Bank Communication and the Social Value of Public Information," Working Papers 2024-03, Swansea University, School of Management.

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