Working Paper: CEPR ID: DP409
Authors: Paul Levine; Joseph Pearlman
Abstract: The effect of asymmetric information on monetary policy is investigated in the context of an overlapping wage contract model. Optimal rules with and without precommitment under full information are compared with the optimal rule without precommitment (i.e. the discretionary rule) under asymmetric information. The results extend those of Cukierman and Meltzer (1986) to a dynamic model with a short-run output/inflation trade-off. The optimal discretionary rate is less than that under full information and there is also a role for ambiguity in the setting of monetary policy. Both these effects of asymmetric information diminish as the average length of wage contracts increases.
Keywords: credibility; asymmetric information; wage-price stickiness; time inconsistency; ambiguity
JEL Codes: 023; 026; 321
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Asymmetric Information (D82) | Optimal Discretionary Inflation Rate (E31) |
| Wage-Price Stickiness (E31) | Credibility of Monetary Policy (E52) |
| Wage-Price Stickiness (E31) | Severity of Time Inconsistency Problem (D15) |
| Ambiguity in Policymaker's Actions (D84) | Expectations of Private Sector (E69) |
| Asymmetric Information (D82) | Optimal Policy Rule (E61) |