Working Paper Revision

The Informational Effect of Monetary Policy and the Case for Policy Commitment

Abstract: I study how the informational effect of monetary policy changes the optimal conduct of monetary policy. In my model, the private sector extracts information about unobserved shocks from the central bank's interest rate decisions. The central bank optimally changes the informational effect of the interest rate by committing to a state-contingent policy rule, in which case the Phillips curve becomes endogenous to the central bank's optimization problem. In a dynamic model, the optimal policy rule overshoots the natural-rate shock and gradually responds to the cost-push shock, which makes the interest rate change expected output growth but not expected inflation.

Keywords: Monetary Policy; information frictions; policy commitment;

JEL Classification: D83; D84; E31;

https://doi.org/10.26509/frbc-wp-201907r

Bibliographic Information

Provider: Federal Reserve Bank of Cleveland

Part of Series: Working Papers

Publication Date: 2022-05-09

Number: 19-07R

Related Works

• Working Paper Revision: The Informational Effect of Monetary Policy and the Case for Policy Commitment