Transparency and Monetary Policy Effectiveness

Romain Baeriswyl and Camille Cornand

Annals of Economics and Statistics, 2011, issue 103-104, 175-194

Abstract: This article analyses the effects of economic transparency on the optimal monetary policy in an economy affected by demand shocks. In an environment of imperfect common knowledge, demand shocks create a trade-off between stabilizing the price level and stabilizing the output gap. The monetary policy implemented by the central bank tends, on the one hand, to offset demand shocks but, on the other hand, to distort the economy because of its mistaken view of the fundamental state of the economy. Transparency is optimal as long as the central bank does not weight the stabilization of the output gap too heavily in its objective function.

Date: 2011
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Working Paper: Transparency and Monetary Policy Effectiveness (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:adr:anecst:y:2011:i:103-104:p:175-194

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