Citation

Discussion Paper Details

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Title: Optimal Monetary Policy when Information is Market-Generated

Author(s): Kenza Benhima and Isabella Blengini

Publication Date: June 2019

Keyword(s): central bank communication, endogenous information, Expectations, Information Frictions and Optimal monetary policy

Programme Area(s): Monetary Economics and Fluctuations

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.

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Bibliographic Reference

Benhima, K and Blengini, I. 2019. 'Optimal Monetary Policy when Information is Market-Generated'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=13817