Information Asymmetries, Transparency, and Monetary Policy

Download or read book Information Asymmetries, Transparency, and Monetary Policy written by and published by . This book was released on 2001 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: Information asymmetries seem to play an important role in monetary economics. We consider three forms of information transmission which can be used to alleviate these information asymmetries. First, if information is verifiable or the publication of information is in the central bank's interest, it is possible for the central bank to alleviate information asymmetries by simply publishing information. This raises the question of the socially optimal degree of transparency in monetary policy. We review the rapidly growing literature on this topic. Then we present three models for evaluating whether the publication of the voting records of the central bank council is socially beneficial, when central bankers differ either with respect to their ability to identify shocks in the economy or with respect to their preferences. Using another simple model, we also examine the question of whether the transparency of the central bank's objectives is desirable from a social perspective. Second, information may not always be credible if it is not verifiable. From a normative viewpoint, this raises the question of the means best suited for information transmission in these cases. We consider monetary targeting and inflation targeting as signaling devices and evaluate their relative merits with respect to welfare when central banks may have superior information on shocks to money demand. Third, it is also possible that central banks may be less well-informed than other economic agents. Then one has to examine the reverse information-transmission process from these economic agents to the central bank. We analyze the strategic interaction between a number of unions and a central bank and evaluate whether the independent acquisition of information about real shocks by the central bank is in the interest of society.