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Informational Effects of Monetary Policy

Author

Listed:
  • Giuseppe Ferrero

    (Bank of Italy)

  • Marcello Miccoli

    (Bank of Italy)

  • Sergio Santoro

    (Bank of Italy)

Abstract

We analyse a simplified New-Keynesian model with an unobserved aggregate cost-push shock in which firms and the central bank have different information about the shock. We consider a linear policy rule where a pure inflation targeting central bank decides how much to react to the shock given its information. In this framework we show that monetary policy performs both an allocational and an informational role, the latter due to firms extracting information on the aggregate shock from the monetary policy tool. When the informational role is present, optimal monetary policy is more cautious, that is, it responds less to the shock than the perfect information benchmark. A more cautious reaction to the shock implies that firms make more effective use of their private information and the endogenous information coming from the aggregate price in order to make inferences about the shock.

Suggested Citation

  • Giuseppe Ferrero & Marcello Miccoli & Sergio Santoro, 2014. "Informational Effects of Monetary Policy," Temi di discussione (Economic working papers) 982, Bank of Italy, Economic Research and International Relations Area.
    • Handle: RePEc:bdi:wptemi:td_982_14
    as

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    References listed on IDEAS

    as
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    More about this item

    Keywords

    imperfect information; endogenous information; learning; monetary policy;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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