Optimal monetary policy and disclosure with an informationally-constrained central banker

Abstract

What is the nature of optimal monetary policy and central bank disclosure when the monetary authority is uncertain about the economic state? We consider a model in which firms make nominal pricing decisions and the central bank sets the nominal interest rate under incomplete information. We find that implementing flexible-price allocations is both feasible and optimal despite the existence of numerous measurability constraints; we explore a series of different implementations. When monetary policy is sub-optimal, public information disclosure by the central bank is welfare-improving as long as either firm or central bank information is sufficiently precise.