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

 

Time: 10:30am-12:00pm, Nov.6,2018

Venue: Room 359S, Overseas Exchange Center, Peking University

Speaker: Chengcheng Jia

(Research Department, Federal Reserve Bank of Cleveland)

 

Abstract:

I explore how asymmetric information between the central bank and the private sector changes the optimal conduct of monetary policy. I build a New Keynesian model in which private agents have imperfect information about underlying shocks, while the central bank has perfect information. In this environment, private agents exact information about underlying shocks from the interest-rate decisions by the central bank. The informational effect of monetary policy makes policy changes self-defeating: when the central bank adjusts the interest rate to offset the effect caused by underlying shocks, the interest rate also reveals information about the realization of underlying shocks. As a result, the private sector reacts more as it has more precise information about the underlying shocks. I show that committing to a state-contingent policy rule alleviate this self-defeating problem by controlling the information revealed through the interest rate.

 

Speaker：

Chengcheng Jia is a Research Economist at the Federal Reserve Bank of Cleveland. Before joining the Bank, she obtained her Ph.D. degree in Economics from Columbia University in 2018. Her research has been focused on monetary policy, informational frictions and financial frictions.