DP13817 Optimal Monetary Policy when Information is Market-Generated

Author(s): Kenza Benhima, Isabella Blengini
Publication Date: June 2019
Keyword(s): central bank communication, endogenous information, Expectations, Information Frictions, Optimal monetary policy
JEL(s): D83, E32, E52, F32
Programme Areas: Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=13817

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.