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

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  • Chengcheng Jia

Abstract

I study how the informational effect of monetary policy changes the optimal conduct of monetary policy. In my model, the private sector extracts information about unobserved shocks from the central bank's interest rate decisions. The central bank optimally changes the informational effect of the interest rate by committing to a state-contingent policy rule, in which case the Phillips curve becomes endogenous to the central bank's optimization problem. In a dynamic model, the optimal policy rule overshoots the natural-rate shock and gradually responds to the cost-push shock, which makes the interest rate change expected output growth but not expected inflation.

Suggested Citation

  • Chengcheng Jia, 2019. "The Informational Effect of Monetary Policy and the Case for Policy Commitment," Working Papers 19-07R, Federal Reserve Bank of Cleveland, revised 09 May 2022.
    • Handle: RePEc:fip:fedcwq:190700
    DOI: 10.26509/frbc-wp-201907r
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    Cited by:

    1. Kurt Graden Lunsford, 2018. "Understanding the Aspects of Federal Reserve Forward Guidance," Working Papers (Old Series) 1815, Federal Reserve Bank of Cleveland.
    2. Enders, Zeno & Hünnekes, Franziska & Müller, Gernot J., 2019. "Monetary policy announcements and expectations: Evidence from german firms," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 45-63.
    3. Kramkov, Viacheslav & Maksimov, Andrey, 2024. "Monetary surprises and term structure of interest rates: Identification through heteroscedasticity," Applied Econometrics, Russian Presidential Academy of National Economy and Public Administration (RANEPA), vol. 74, pages 5-34.
    4. Ehrmann, Michael & Gaballo, Gaetano & Hoffmann, Peter & Strasser, Georg, 2019. "Can more public information raise uncertainty? The international evidence on forward guidance," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 93-112.
    5. Chengcheng Jia, 2019. "Forward Guidance under Imperfect Information: Instrument Based or State Contingent?," Working Papers 19-22, Federal Reserve Bank of Cleveland.
    6. Wesley Janson & Chengcheng Jia, 2020. "The Information Effect of Monetary Policy: Self-Defeating or Optimal?," Economic Commentary, Federal Reserve Bank of Cleveland, vol. 2020(15), pages 1-5, July.

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    More about this item

    Keywords

    Monetary Policy; information frictions; policy commitment;
    All these keywords.

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation

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