Optimal Monetary Policy when Information is Market-Generated

Kenza Benhima and Isabella Blengini

Cahiers de Recherches Economiques du Département d'économie from Université de Lausanne, Faculté des HEC, Département d’économie

Abstract: Endogenous - i.e. market-generated - signals observed by firms have crucial implications for monetary policy. When information is endogenous, firms gather a demand signal from their market that is both real and nominal. As a result, the traditional surprise channel of monetary policy is absent. Instead, monetary policy works through a signaling channel, as it affects firms' information through the demand signal. The optimal policy is then the signaling policy, i.e. the policy that maximizes the information content of the demand signal. In our setup, the signaling policy targets a positive correlation between money supply and prices, which emphasizes the natural response of prices to real shocks. On the contrary, in the more traditional case of exogenous information, optimal monetary policy would stabilize prices as it acts through the surprise channel. We show that the signaling policy is optimal regardless of the amount of attention that firms pay to central bank communication.

Keywords: Optimal monetary policy; information frictions; expectations; central bank communication (search for similar items in EconPapers)
JEL-codes: D83 E32 E52 (search for similar items in EconPapers)
Pages: 55 pp.
Date: 2017-07
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Optimal Monetary Policy when Information is Market-Generated (2020)
Working Paper: Optimal Monetary Policy when Information is Market-Generated (2019)
Working Paper: Optimal Monetary Policy when Information is Market-Generated (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:lau:crdeep:17.14

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