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Optimal Monetary Policy with Informational Frictions

George-Marios Angeletos () and Jennifer La'O ()

No 17525, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper studies optimal policy in a business-cycle setting in which firms have a blurry understanding of the state of the economy due to informational or cognitive constraints. The latter are not only the source of nominal rigidity but also an impediment in the coordination of production. The optimal allocation thus differs from familiar Ramsey benchmarks (Lucas and Stokey, 1983; Correia, Nicolini, and Teles, 2008) in manners that may be misinterpreted as a call for macroeconomic stabilization. Furthermore, conventional policy instruments serve new functions: they manipulate the firms’ collection and use of information or their cognitive efforts. Despite these facts, the optimal taxes are similar to those in the aforementioned benchmarks and the optimal monetary policy replicates flexible-price allocations. On the other hand, the rationale for price stability falls apart: replicating flexible-price allocations and minimizing relative-price distortions become equivalent to a certain form of “leaning against the wind”.

JEL-codes: D61 D83 E32 E52 (search for similar items in EconPapers)
Date: 2011-11
New Economics Papers: this item is included in nep-cba, nep-cta, nep-mac and nep-mon
Note: EFG ME
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Citations: View citations in EconPapers (6) Track citations by RSS feed

Published as George-Marios Angeletos & Jennifer La’O, 2020. "Optimal Monetary Policy with Informational Frictions," Journal of Political Economy, vol 128(3), pages 1027-1064.

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