infonet-economy

In this paper we show that endogenous - i.e. market-generated - signals observed by the private sector have crucial implications for monetary policy. When informationis endogenous, achieving the optimum through price stabilization is elusive. The optimal policy then consists, on the contrary, in exacerbating the natural response of.prices to shocks. In our framework, where supply shocks are naturally deflationary, optimal policy is then countercyclical, whereas the standard price-stabilizing policy would have been procyclical. The role of endogenous signals is indep endent of the possibility of the central bank to directly communicate its private information through public announcements.