MONETARY NEUTRALITY AND OPTIMALITY WITH SYMMETRIC PARTIAL INFORMATION

The neutrality and optimality of countercyclical monetary policy are examined in a representative economy featuring competitive equilibria in multiple markets and rational expectations based on a form of private information about current stochastic innovations in the economy. A necessary and suffici...

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Bibliographic Details
Published in:International economic journal 1988-12, Vol.2 (4), p.57-71
Main Authors: Courchane, Marsha J, Nickerson, David B
Format: Article
Language:English
Subjects:
Monetary theory
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Summary:The neutrality and optimality of countercyclical monetary policy are examined in a representative economy featuring competitive equilibria in multiple markets and rational expectations based on a form of private information about current stochastic innovations in the economy. A necessary and sufficient condition for the neutrality of monetary policy is stated in terms of restrictions on the parameters of the linear rule describing prospective monetary feedback. Optimal monetary policy is fully characterized in terms of an alternative set of parameter restrictions. Optimal monetary feedback completely stabilizes deviations in commodity output by eliminating the influence of those current innovations about which agents cannot directly observe from the rational expectations of agents. Reprinted by permission of Taylor and Francis Ltd.
ISSN:1016-8737
DOI:10.1080/10168738800080026