Optimal information acquisition and monetary policy

IV Thomas E. Cone ()

Journal of Macroeconomics, 2008, vol. 30, issue 4, pages 1370-1389

Abstract: I study optimal monetary policy with an expectational AS curve and private agents who optimally choose their amount of information pertinent to predicting policy. Shocks with time-varying variance (ARCH) induce interesting information acquisition (IA) dynamics; optimal IA affects optimal policy and vice versa. Under discretion, IA dynamics cause time-varying effectiveness of policy because of the expectational AS curve; policy may be rendered completely ineffective. In policy game equilibrium, a fall in the shock's variance typically induces less IA and raises welfare. In one exceptional case the opposite occurs, a result which does not require implausible unstable equilibria. An agent becoming informed increases the endogenous component of economic volatility; IA therefore has a negative externality. Under commitment policy's effectiveness is again time-varying, but policy is never completely ineffective: commitment enables the central bank to credibly limit policy's volatility; this limits private agents' incentive to become informed, so limits expectation-induced policy neutrality.

Keywords: Information; Expectations; Monetary; policy (search for similar items in EconPapers)
Date: 2008

Downloads: (external link)
http://www.sciencedirect.com/science/article/B6X4M ... 042de85367eaef63e897
Full text for ScienceDirect subscribers only

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: http://EconPapers.repec.org/RePEc:eee:jmacro:v:30:y:2008:i:4:p:1370-1389

Access Statistics for this article

Journal of Macroeconomics is edited by Douglas McMillin and Theodore Palivos

More articles in Journal of Macroeconomics from Elsevier
Series data maintained by Heidi Boesdal ().