The signaling role of policy actionsRomain Baeriswyl and Camille Cornand Journal of Monetary Economics, 2010, vol. 57, issue 6, 682-695 Abstract: In an economy affected by shocks that are imperfectly known, the monetary instrument takes on a dual stabilizing role: as a policy response that directly influences the economy and as a vehicle for information that reveals the central bank's assessment to firms. Because mark-up shocks cannot be neutralized by monetary policy, providing firms with more information about these shocks exacerbates their reaction and creates a larger distortion. Recognizing the signaling role of its instrument, the central bank distorts its policy response in order to optimally shape firms' beliefs. While providing firms with more information is always detrimental to the output gap, it has a more subtle effect on price dispersion depending on whether information is provided through the transparency channel or through the signaling channel. Although more transparency is always detrimental to welfare, the information that is conveyed by the monetary instrument improves welfare when firms' coordination is highly valuable. Date: 2010 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:57:y:2010:i:6:p:682-695 Access Statistics for this article Journal of Monetary Economics is currently edited by R. G. King and C. I. Plosser More articles in Journal of Monetary Economics from Elsevier |
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