Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/128049
Authors: 
Mertens, Elmar
Year of Publication: 
2008
Series/Report no.: 
Working Paper, Study Center Gerzensee 08.02
Abstract: 
Monetary policy is most effective when public beliefs about future policies are actively managed. This is the appeal of policy rules and commitment strategies, typically absent under discretion. But when a policymaker has some private information - as is the case in reality - belief management becomes an integral part of optimal discretion policies, too. Solving for optimal policy in a simple New Keynesian model, this paper shows how discretionary losses are reduced when the policymaker has private information. Furthermore, disinflations are pursued more vigorously, when the hidden information problem is larger, even when inflation is partly backward-looking.
Subjects: 
Optimal Monetary Policy
Discretion
Time-Consistent Policy
Markov-Perfect Equilibrium
Incomplete Information
Kalman Filter
JEL: 
E31
E37
E47
E52
E58
Document Type: 
Working Paper

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