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Managing Beliefs about Monetary Policy under Discretion
Author(s) -
MERTENS ELMAR
Publication year - 2016
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12314
Subject(s) - discretion , economics , monetary policy , imperfect , private information retrieval , perfect information , new keynesian economics , simple (philosophy) , public policy , public economics , microeconomics , macroeconomics , computer science , political science , economic growth , linguistics , philosophy , computer security , epistemology , law
In models of monetary policy, discretionary policymaking is typically constrained in its ability to manage public beliefs. However, when a policymaker possesses private information, policy actions serve as signals to the public about unobserved economic conditions and belief management becomes an integral part of optimal discretion policies. This article derives the optimal time‐consistent policy for a general linear‐quadratic setting. The optimal policy is illustrated in a simple New Keynesian model, where analytical solutions can be derived as well. In this model, imperfect information about the policymaker's output target leads to lower policy losses.