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Optimal Monetary Policy when Information is Market-Generated

Kenza Benhima () and Isabella Blengini

No 13817, CEPR Discussion Papers from C.E.P.R. Discussion Papers

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 maximizing the information content of that signal. When real shocks are deflationary (like labor 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 stabilizes 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.

Keywords: central bank communication; endogenous information; Expectations; Information Frictions; Optimal monetary policy (search for similar items in EconPapers)
JEL-codes: D83 E32 E52 F32 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2019-06
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Working Paper: Optimal Monetary Policy when Information is Market-Generated (2017) Downloads
Working Paper: Optimal Monetary Policy when Information is Market-Generated (2016) Downloads
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