TY  - UNPD
A1  - Adam, Klaus
T1  - Optimal monetary policy with imperfect common knowledge
T2  - Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 2003,12
N2  - We study optimal nominal demand policy in an economy with monopolistic competition and flexible prices when firms have imperfect common knowledge about the shocks hitting the economy. Parametrizing firms´ information imperfections by a (Shannon) capacity parameter that constrains the amount of information flowing to each firm, we study how policy that minimizes a quadratic objective in output and prices depends on this parameter. When price setting decisions of firms are strategic complements, for a large range of capacity values optimal policy nominally accommodates mark-up shocks in the short-run. This finding is robust to the policy maker observing shocks imperfectly or being uncertain about firms´ capacity parameter. With persistent mark-up shocks accommodation may increase in the medium term, but decreases in the long-run thereby generating a hump-shaped price response and a slow reduction in output. Instead, when prices are strategic substitutes, policy tends to react restrictively to mark-up shocks. However, rational expectations equilibria may then not exist with small amounts of imperfect common knowledge.
T3  - CFS working paper series - 2003, 12 
KW  - optimal policy
KW  - information frictions
KW  - imperfect common knowledge
KW  - higher order beliefs
KW  - Shannon capacity
KW  - Geldpolitik
Y1  - 2003
UR  - http://publikationen.ub.uni-frankfurt.de/frontdoor/index/index/docId/4477
UR  - https://nbn-resolving.org/urn:nbn:de:hebis:30-10189
ER  -