Yuichiro Waki | The University of Queensland
How should monetary policy be designed when the central bank has private information about future economic conditions?
When private news about shocks to future fundamentals is added to an otherwise standard new Keynesian model, social welfare deteriorates by the central bank's reaction to or revelation of such news. There exists the expected virtue of ignorance, and secrecy or 'ignorance is bliss' constitutes optimal policy.
This result holds when news are about cost-push shocks, or about shocks to the monetary policy objective, or about shocks to the natural rate of interest, and even when the zero lower bound of nominal interest rates is taken into account. A lesson of our analysis for a central bank's communication strategy is that Delphic forward guidance that helps the private sector form more accurate forecast for future shocks can be undesirable and the central bank should instead aim to communicate its state-contingent policy.
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