Optimal Informational Interest Rate Rule

Marta Areosa, Waldyr Areosa and Vinicius Carrasco

No 553, Working Papers Series from Central Bank of Brazil, Research Department

Abstract: We use a sticky-dispersed information model to analyze how price setting changes when the interest rate is understood as a public signal that informs the view of the monetary authority on the current state of the economy. Firms use information to infer one another´s prices, as they face strategic complementarity on pricing decision. We build a counterfactual to isolate the informational effect of the interest rate and study its influence on inflation dynamics. We also obtain the optimal parameters of the policy instrument (regarding three different efficiency criteria), considering that the central bank knows that firms take information from its actions.

Date: 2021-06
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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