Journal of Political Economy Vol. 128 No. 3 2020
Optimal Monetary Policy with Informational Frictions
Abstract
We study optimal policy in a business-cycle setting in which firms hold dispersed private information about, or are rationally inattentive to, the state of the economy. The informational friction is the source of both nominal and real rigidity. Because of the latter, the optimal monetary policy does not target price stability. Instead, it targets a negative relation between the nominal price level and real economic activity. Such leaning against the wind helps maximize production efficiency. An additional contribution is the adaptation of the primal approach of the Ramsey literature to a flexible form of informational friction.
- DOI
- 10.1086/704758
- Volume
- 128
- Issue
- 3
- Pages
- 1027-1064
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref