Optimal Monetary Policy when Information is Market-Generated

Kenza Benhima and Isabella Blengini

The Economic Journal, 2020, vol. 130, issue 628, 956-975

Abstract: The nature of the private sector's information changes the optimal conduct of monetary policy. When firms observe their individual demand and use it as a signal of real shocks, the optimal policy consists in maximising the information content of that signal. When real shocks are deflationary (like labour supply shocks), the optimal policy is countercyclical and magnifies price movements, which contrasts with the exogenous information case, where optimal monetary policy is procyclical and stabilises prices. When the central bank communicates its information to the public, this policy is still optimal if firms pay limited attention to central bank announcements.

Date: 2020
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Related works:
Working Paper: Optimal Monetary Policy when Information is Market-Generated (2019)
Working Paper: Optimal Monetary Policy when Information is Market-Generated (2017)
Working Paper: Optimal Monetary Policy when Information is Market-Generated (2016)
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