The Informational Effect of Monetary Policy and the Case for Policy Commitment

Chengcheng Jia

No 19-07R, Working Papers from Federal Reserve Bank of Cleveland

Abstract: I study how the informational effect of monetary policy changes the optimal conduct of monetary policy. In my model, the private sector extracts information about unobserved shocks from the central bank's interest rate decisions. The central bank optimally changes the informational effect of the interest rate by committing to a state-contingent policy rule, in which case the Phillips curve becomes endogenous to the central bank's optimization problem. In a dynamic model, the optimal policy rule overshoots the natural-rate shock and gradually responds to the cost-push shock, which makes the interest rate change expected output growth but not expected inflation.

Keywords: Monetary Policy; information frictions; policy commitment (search for similar items in EconPapers)
JEL-codes: D83 D84 E31 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2019-04-17, Revised 2022-05-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

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Journal Article: The informational effect of monetary policy and the case for policy commitment (2023)
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DOI: 10.26509/frbc-wp-201907r

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