The signaling role of policy actions

Romain Baeriswyl () and Camille Cornand
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Romain Baeriswyl: Swiss National Bank - Swiss National Bank, LMU - Ludwig Maximilian University [Munich] = Ludwig Maximilians Universität München

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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.

Keywords: Policy action; Central bank; Firms (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (90)

Published in Journal of Monetary Economics, 2010, 57 (6), pp.682-695. ⟨10.1016/j.jmoneco.2010.06.001⟩

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Journal Article: The signaling role of policy actions (2010)
Working Paper: The signaling role of policy action (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-01704165

DOI: 10.1016/j.jmoneco.2010.06.001

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