Aggregate shock and monetary policy regimes
Hyuk-jae Rhee and
Journal of Macroeconomics, 2010, vol. 32, issue 1, 201-217
We study monetary policy transparency with regard to publication of central bank forecasts of the future state of the economy in the New Keynesian framework. The central bank has private information about the future aggregate shock. We compare two possible monetary policy regimes, transparent and opaque. The ex-ante welfare level is higher under the opaque regime, in which the central bank does not release its forecast. This is due to smoother consumption over the business cycle. We demonstrate that the welfare difference between the two regimes increases with the degree of monopoly power in the intermediate sector. In particular, the welfare difference vanishes when the intermediate sector is perfectly competitive. We also show that the welfare difference increases with the accuracy of information possessed by the central bank, and the welfare difference disappears when the central bank has no information advantage over the private sector about the economy. And, finally, we establish that the welfare difference increases with the level of shock fluctuations.
Keywords: Monetary; policy; Transparency; Central; bank (search for similar items in EconPapers)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:32:y:2010:i:1:p:201-217
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