This paper considers two challenges that improvements in private-sector information-processing capabilities may pose for the effectiveness of monetary policy. It first considers the consequences of improved information about central-bank actions, and argues that the management of expectations will become even more important to effective monetary policy. The paper next considers the consequences of the potential erosion of private-sector demand for central-bank money. This should not fundamentally impair the ability of central banks to achieve their stabilization objectives, though it may require a new approach to the implementation of monetary policy. The advantages of a 'channel' system, in which central-bank standing facilities are the main tool used to control overnight interest rates, are discussed.
*Published:
Michael Woodford, 2001. "Monetary policy in the information economy," Proceedings, Federal Reserve Bank of Kansas City, pages 297-370.
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