Monetary Policy in an Imperfect Information World

Abstract

The widespread development of models of imperfect information has provided a wealth of new perspectives for investigating the impact of monetary policy on both long-term economic growth and cyclical fluctuations.1 This body of work describes a number of new theoretical mechanisms which may affect the role of monetary policy. Indeed, a complete enumeration of the potential monetary effects in question is beyond the scope of any single paper of manageable length, and this chapter does not attempt to provide such a summary. Instead it analyses monetary policy in the context of a single particular model. Nevertheless, the focused model presented in this chapter has broad implications which capture many of the general features of the new imperfect-information-based monetary models, particularly the ways in which they differ from traditional classical and Keynesian alternatives. Monetary policy in this model does have consistent real effects on output, but it operates as much by reducing business risk and by redistributing resources to the business sector as it does by stimulating aggregate demand through interest rate reductions. Moreover, these effects do not depend on many of the familiar price-rigidity and closed-economy features which drive other models of monetary policy effectiveness.KeywordsInterest RateMonetary PolicyReal Exchange RateMoney SupplyMoney DemandThese keywords were added by machine and not by the authors. This process is experimental and the keywords may be updated as the learning algorithm improves.