TY  - JOUR
AU  - Jones,Larry E.
AU  - Manuelli,Rodolfo E.
TI  - Volatile Policy and Private Information:  The Case of Monetary Policy
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7072
PY  - 1999
Y2  - April 1999
UR  - http://www.nber.org/papers/w7072
L1  - http://www.nber.org/papers/w7072.pdf
N1  - Author contact info:
Larry E. Jones
Department of Economics
University of Minnesota
4-101 Hanson Hall
1925 Fourth Street South
Minneapolis, MN 55455
Tel: 612/624-4553
Fax: 612/624-0209
E-Mail: lej@umn.edu

Rodolfo Manuelli
Department of Economics
Washington University in St. Louis
Campus Box 1208;
St. Louis MO 63130-4899
Tel: 608/263-3877
Fax: 608/262-2033;608/263-3876
E-Mail: manuelli@artsci.wustl.edu
AB  - In this paper we study how volatility in monetary policy affects economic performance in the presence of endogenously chosen information structures. To isolate the effects produced by the interaction of uncertainty in monetary policy and (possibly) asymmetric information, we consider a model in which in the absence of either one of these features the equilibrium would be efficient. The equilibria that we find, with volatility and asymmetry of information, are inefficient for two reasons: first, in some cases, economic agents fail to trade, even though it is always efficient to do so; second, to capture the rents associated with being informed, agents spend resources acquiring socially useless information. Thus, in addition to the more standard effects of volatile inflation, our model calls attention to two types of costs associated with monetary uncertainty: the cost of not trading, and the cost of allocating resources to wasteful activities. The model implies that if monetary policy is not volatile all agents are symmetrically informed and hence, the outcome is efficient. Alternatively, making policy  transparent,' i.e guaranteeing that all agents share the same information, serves the same purpose.
ER  -