We study how volatility in monetary policy affects economic performance in the presence of asymmetric information and endogenously chosen information structures. We consider a model in which in the absence of either feature the equilibria would be efficient. The equilibria that we find are inefficient for two reasons: first, in some cases, agents fail to trade, even though it is efficient to do so; second, agents spend resources acquiring socially useless information. The model predicts a nonlinear relationship between inflation and output and a complex pattern of price dispersion, with the nature of the relationship changing with the degree of volatility. Journal of Economic Literature Classification Numbers: E30, E40, D82.
Bibliographical noteFunding Information:
1The authors thank the NSF for providing financial support for this research. Part of this work was done when both authors visited the Bank of Portugal, which provided a stimulating research environment. They also thank John Kennan, Bob Lucas, Tom Sargent, Nancy Stokey, Steve Williamson, an associate editor of the Journal, and seminar participants for useful conversations on these topics. 2To whom correspondence should be addressed.
- Asymmetric information
- Monetary policy