Optimal Monetary Policy and Transparency under Informational Frictions

Wataru Tamura

Journal of Money, Credit and Banking, 2016, vol. 48, issue 6, 1293-1314

Abstract: This paper examines the optimal monetary policy and central bank transparency in an economy where firms set prices under informational frictions. The economy is subject to two types of shocks determining the efficient output level and firms' desired markups. To minimize the welfare‐reducing output gap and price dispersion between firms, the central bank controls firms' incentives and expectations by using a monetary instrument and disclosing information on the realized shocks. This paper shows that an optimal policy comprises the disclosure of a linear combination of the two shocks and the adjustment of monetary instruments contingent on the disclosed information.

Date: 2016
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https://doi.org/10.1111/jmcb.12334

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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:48:y:2016:i:6:p:1293-1314

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