Public Information and Monetary Policy

Ted Loch Temzelides, Cyril Monnet and Marie Hoerova

No 5, 2008 Meeting Papers from Society for Economic Dynamics

Abstract: We study the nature of monetary policy in a model where uncertainty can lead to a discrepancy between economic agents' beliefs and true fundamentals. Monetary policy transmits information about fundamentals. The public nature of this information can help agents to coordinate their decisions. This comes at a cost, however, since monetary policy may lead the private sector to coordinate on the wrong fundamentals and it may result in inflation. We discuss conditions under which monetary policy will be unambiguously welfare-improving. We formalize the notion that monetary policy is equivalent to information revelation by the central bank, and offer an information-based (as opposed to the standard liquidity-based) argument for why higher nominal rate hikes occur less frequently than lower ones.

Date: 2008
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