TY - JOUR
T1 - Optimal monetary policy with informational frictions
AU - Angeletos, George Marios
AU - La’o, Jennifer
N1 - Funding Information:
This paper extends, and subsumes, earlier drafts that concerned the same topic but contained a narrower methodological contribution (Angeletos and La’O 2008, 2011). We are particularly grateful to the editor, Harald Uhlig, and three anonymous referees for detailed and constructive feedback on the latest version. We thank Robert King and Philippe Bac-chetta for discussing early versions of our paper and Karthik Sastry for research assistance. We also benefited from comments received in numerous conferences and seminars. Finally, Angeletos acknowledges that this material is based in part upon work supported by the National Science Foundation under grant SES-175719.
Publisher Copyright:
© 2020 by The University of Chicago. All rights reserved.
PY - 2020/3/1
Y1 - 2020/3/1
N2 - 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.
AB - 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.
UR - http://www.scopus.com/inward/record.url?scp=85080075076&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=85080075076&partnerID=8YFLogxK
U2 - 10.1086/704758
DO - 10.1086/704758
M3 - Article
AN - SCOPUS:85080075076
SN - 0022-3808
VL - 128
SP - 1027
EP - 1064
JO - Journal of Political Economy
JF - Journal of Political Economy
IS - 3
ER -