June 2010 issue contents
Optimal Monetary Policy in Response to Cost-Push Shocks: The Impact of Central Bank Communication

by Romain Baeriswyl^a and Camille Cornand^b

Abstract

This paper argues that a central bank's optimal policy in response to a cost-push shock depends upon its disclosure regime. More precisely, a credible central bank may find it optimal to implement an accommodative monetary policy in response to a positive cost-push shock whenever the uncertainty surrounding its monetary instrument is high. Indeed, the degree of the central bank's transparency influences the effectiveness of its policy to stabilize inflation in terms of output gap. The effectiveness, in turn, determines whether it will implement an expansionary or contractionary policy in response to a positive cost-push shock.

JEL Codes: E58, E52, D82.

 
Full article (PDF, 22 pages 280 kb)

^a Munich Graduate School of Economics and Swiss National Bank
^b BETA CNRS-University of Strasbourg