Inflation and output volatility under asymmetric incomplete information

Giacomo Carboni () and Martin Ellison ()
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Giacomo Carboni: European Central Bank, Kaiserstrasse 29, 60311 Frankfurt am Main, Germany., http://www.ecb.europa.eu/home/html/index.en.html

No 1092, Working Paper Series from European Central Bank

Abstract: The assumption of asymmetric and incomplete information in a standard New Keynesian model creates strong incentives for monetary policy transparency. We assume that the central bank has better information about its objectives than the private sector, and that the private sector has better information about shocks than the central bank. Transparency has the potential to trigger a virtuous circle in which all agents find it easier to make inferences and the economy is better stabilised. Our analysis improves upon existing work by endogenising the volatility of both output and inflation. Improved transparency most likely manifests itself in falling output volatility. JEL Classification: E32, E37, E52.

Keywords: Imperfect credibility; Asymmetric information; Signal extraction. (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-cta, nep-mac and nep-mon
Date: 2009-09
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