Optimal Monetary Policy and Transparency under Informational Frictions∗

This paper studies optimal monetary policy and central bank transparency in an economy where firms set prices under informational frictions. The economy is subject to two types of shocks which determine the efficient level of output and the firms’ desired mark-up. To minimize the welfare-reducing output gap and price dispersion among the firms, the central bank controls the firms’ incentives and expectations by using a monetary instrument and information disclosure about the fundamentals. This paper shows that the optimal policy entails partial disclosure of information and adjustment of the monetary instrument contingent on the disclosed information. Under the optimal policy, the public information is given by a weighted difference of the two shocks so as to induce a negative correlation between those conditional expectations, and monetary policy should offset a detrimental effect of such a disclosure policy on price stabilization. JEL Classification: E31, E52, D83