Optimal Monetary Policy when Information is Market-Generated

Isabella Blengini and Kenza Benhima
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Isabella Blengini: Ecole hôtelière de Lausanne

No 1223, 2016 Meeting Papers from Society for Economic Dynamics

Abstract: In this paper we study how the endogenous nature of the signals ob- served by the private sector affects optimal monetary policy. Agents learn from sources of information that are not market-determined, such as news, but also from variables that are endogenously determined on the markets, such as prices or production. In that case, how can the central optimally condition its monetary instrument on its information? When signals re- ceived by private agents are purely exogenous, it is optimal for the central bank to directly steer the economy towards the efficient allocation. This can be achieved through a price stabilization objective. In this case the public does not need to infer the state of the economy and the central bank is in charge of all the action. When information is endogenous, the policy of the central bank is aimed at maximizing the information content of the market-determined variables that agents use as sources of information. This is achieved by exacerbating the natural response of prices to shocks. This result holds independently of the possibility of the central bank to directly communicate its information through public announcements.

Date: 2016
New Economics Papers: this item is included in nep-mac, nep-mon and nep-net
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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 (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:1223

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