Central bank policy instrument forecasts

Hyuk Rhee () and Nurlan Turdaliev ()

Journal of Economic Interaction and Coordination, 2015, vol. 10, issue 2, 245 pages

Abstract: Using a version of the New Keynesian model with heterogeneous agents we study the issue of usefulness of central bank forecasts of their policy instruments. The economy, which consists of many industries and heterogeneous households whose preferences differ with respect to the value of leisure, experiences both supply and demand shocks. The central bank has private information regarding these shocks. Under a transparent regime within which the central bank releases its forecasts of its policy instruments, the optimal policy keeps the wedges between marginal rate of substitution and marginal rate of transformation constant across the states. This is not necessarily the case for the opaque regime where the central bank does not release its policy instrument forecasts. We first show that for any policy under the transparent regime there exists a policy under the opaque regime that delivers the same allocation. In other words, in general the opaque regime delivers a higher level of welfare. We next demonstrate that for a certain class of utility functions publication of central bank forecasts does not matter for optimal monetary policy. In other words, with or without publication of forecasts, the central bank’s optimal policy would result in the same allocation of resources and the same level of welfare. Copyright Springer-Verlag Berlin Heidelberg 2015

Keywords: Monetary policy; Transparency; Central bank; Ramsey problem; E52; E58 (search for similar items in EconPapers)
Date: 2015
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DOI: 10.1007/s11403-013-0120-2

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