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The signaling role of policy action.
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Abstract
This paper analyzes the conduct of the optimal monetary policy with imperfect information on the shocks hitting the economy where firms’ prices are strategic complements. Monetary policy entails a dual stabilizing role, as a policy response that influences directly the economy and as a vehicle for information that shapes firms’ beliefs. In the case where more information is welfare detrimental, the central bank faces a dilemma, for its monetary instrument aimed at stabilizing the economy may harmfully shape firms’ beliefs. Recognizing the signaling role of its instrument, the central bank finds it optimal to distort its policy response in order to mitigate the detrimental information that it may convey.differential information, monetary policy, transparency.