Optimal Monetary Policy with Informational Frictions
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Marios1122.pdf
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880.78 KB
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Author(s)
Angeletos, George-Marios
La'O, Jennifer
Date Issued
November 5, 2011
Publisher
Cambridge, MA: Department of Economics, Massachusetts Institute of Technology
Series/Report no.
Working Paper (Massachusetts Institute of Technology, Dept. of Economics);11-22
Abstract
We study optimal monetary policy in an environment in which firms’ pricing and production decisions are subject to informational frictions. Our framework accommodates multiple formalizations of these frictions, including dispersed private information, sticky information, and certain forms of inattention. An appropriate notion of constrained efficiency is analyzed alongside the Ramsey policy problem. Similar to the New-Keynesian paradigm, efficiency obtains with a subsidy that removes the monopoly distortion and a monetary policy that replicates flexible-price allocations. Nevertheless, “divine coincidence” breaks down and full price stability is no more optimal. Rather, the optimal policy is to “lean against the wind”, that is, to target a negative correlation between the price level and real economic activity.
Description
Revised version
Subjects
business cycles
dispersed information
sticky information
rational inattention
optimal policy
price stability
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