Optimal Monetary Policy with Informational Frictions / George-Marios Angeletos, Jennifer La'O.

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Angeletos, George-Marios

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TextSeries: Working Paper Series (National Bureau of Economic Research) ; no. w17525.Publication details: Cambridge, Mass. National Bureau of Economic Research 2011.Description: 1 online resource: illustrations (black and white)Subject(s):

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Abstract: This paper studies optimal policy in a business-cycle setting in which firms have a blurry understanding of the state of the economy due to informational or cognitive constraints. The latter are not only the source of nominal rigidity but also an impediment in the coordination of production. The optimal allocation thus differs from familiar Ramsey benchmarks (Lucas and Stokey, 1983; Correia, Nicolini, and Teles, 2008) in manners that may be misinterpreted as a call for macroeconomic stabilization. Furthermore, conventional policy instruments serve new functions: they manipulate the firms' collection and use of information or their cognitive efforts. Despite these facts, the optimal taxes are similar to those in the aforementioned benchmarks and the optimal monetary policy replicates flexible-price allocations. On the other hand, the rationale for price stability falls apart: replicating flexible-price allocations and minimizing relative-price distortions become equivalent to a certain form of "leaning against the wind".

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Item type	Home library	Collection	Call number	Status	Date due	Barcode	Item holds
Working Paper	Biblioteca Digital	Colección NBER	nber w17525 (Browse shelf(Opens below))	Not For Loan

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Previous	nber w17522 Government Policy and Ownership of Financial Assets /	nber w17523 A survey of venture capital research /	nber w17524 Trade Liberalization and Embedded Institutional Reform: Evidence from Chinese Exporters /	nber w17525 Optimal Monetary Policy with Informational Frictions /	nber w17526 Agricultural Policy, Migration, and Malaria in the 1930s United States /	nber w17527 Teaching Practices and Social Capital /	nber w17528 The Effect of FDA Advisories on Branded Pharmaceutical Firms' Valuations and Promotion Efforts /	Next

November 2011.

This paper studies optimal policy in a business-cycle setting in which firms have a blurry understanding of the state of the economy due to informational or cognitive constraints. The latter are not only the source of nominal rigidity but also an impediment in the coordination of production. The optimal allocation thus differs from familiar Ramsey benchmarks (Lucas and Stokey, 1983; Correia, Nicolini, and Teles, 2008) in manners that may be misinterpreted as a call for macroeconomic stabilization. Furthermore, conventional policy instruments serve new functions: they manipulate the firms' collection and use of information or their cognitive efforts. Despite these facts, the optimal taxes are similar to those in the aforementioned benchmarks and the optimal monetary policy replicates flexible-price allocations. On the other hand, the rationale for price stability falls apart: replicating flexible-price allocations and minimizing relative-price distortions become equivalent to a certain form of "leaning against the wind".