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The signaling role of policy actions

Author

Listed:
  • Romain Baeriswyl

    (Swiss National Bank - Swiss National Bank, LMU - Ludwig Maximilian University [Munich] = Ludwig Maximilians Universität München)

  • Camille Cornand

    (BETA - Bureau d'Économie Théorique et Appliquée - INRA - Institut National de la Recherche Agronomique - UNISTRA - Université de Strasbourg - UL - Université de Lorraine - CNRS - Centre National de la Recherche Scientifique)

Abstract

In an economy affected by shocks that are imperfectly known, the monetary instrument takes on a dual stabilizing role : as a policy response that directly influences the economy and as a vehicle for information that reveals the central bank's assessment to firms. Because mark-up shocks cannot be neutralized by monetary policy, providing firms with more information about these shocks exacerbates their reaction and creates a larger distortion. Recognizing the signaling role of its instrument, the central bank distorts its policy response in order to optimally shape firms' beliefs. While providing firms with more information is always detrimental to the output gap, it has a more subtle effect on price dispersion depending on whether information is provided through the transparency channel or through the signaling channel. Although more transparency is always detrimental to welfare, the information that is conveyed by the monetary instrument improves welfare when firms' coordination is highly valuable.

Suggested Citation

  • Romain Baeriswyl & Camille Cornand, 2010. "The signaling role of policy actions," Post-Print halshs-01704165, HAL.
    • Handle: RePEc:hal:journl:halshs-01704165
    DOI: 10.1016/j.jmoneco.2010.06.001
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Policy action; Central bank; Firms;
    All these keywords.

    JEL classification:

    • 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
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design

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