Optimal Monetary Policy with Informational Frictions

George-Marios Angeletos and Jennifer La’O
Authors registered in the RePEc Author Service: Jennifer La'O

Journal of Political Economy, 2020, vol. 128, issue 3, 1027 - 1064

Abstract: We study optimal policy in a business-cycle setting in which firms hold dispersed private information about, or are rationally inattentive to, the state of the economy. The informational friction is the source of both nominal and real rigidity. Because of the latter, the optimal monetary policy does not target price stability. Instead, it targets a negative relation between the nominal price level and real economic activity. Such leaning against the wind helps maximize production efficiency. An additional contribution is the adaptation of the primal approach of the Ramsey literature to a flexible form of informational friction.

Date: 2020
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Citations: View citations in EconPapers (24)

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Working Paper: Optimal Monetary Policy with Informational Frictions (2011)
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