The signalingroleofpolicyactions

In aneconomyaffectedbyshocksthatareimperfectlyknown,themonetaryinstrument takesonadualstabilizingrole:asapolicyresponsethatdirectlyinfluencesthe economyandasavehicleforinformationthatrevealsthecentralbank’sassessmentto firms.Becausemark-upshockscannotbeneutralizedbymonetarypolicy,providing firmswithmoreinformationabouttheseshocksexacerbatestheirreactionandcreates a largerdistortion.Recognizingthesignalingroleofitsinstrument,thecentralbank distortsitspolicyresponseinordertooptimallyshapefirms’beliefs.Whileproviding firmswithmoreinformationisalwaysdetrimentaltotheoutputgap,ithasamore subtleeffectonpricedispersiondependingonwhetherinformationisprovidedthrough thetransparencychannelorthroughthesignalingchannel.Althoughmoretranspar- ency isalwaysdetrimentaltowelfare,theinformationthatisconveyedbythemonetary instrumentimproveswelfarewhenfirms’coordinationishighlyvaluable