Optimal Monetary Policy in Response to Supply Inflation : the Impact of Central Bank Communication

Romain Baeriswyl (1, 2) , Camille Cornand (3)

1 Swiss National Bank
2 LMU - Ludwig Maximilian University [Munich] = Ludwig Maximilians Universität München
3 BETA - Bureau d'Économie Théorique et Appliquée

This paper argues that a central bank’s optimal policy in response to a cost-push shock depends upon its disclosure regime. More precisely, a credible central bank may find it optimal to implement an accommodative monetary policy in response to a positive cost-push shock whenever the uncertainty surrounding its monetary instrument is high. Indeed, the degree of the central bank’s transparency influences the effectiveness of its policy to stabilize inflation in terms of output gap. The effectiveness, in turn, determines whether it will implement an expansionary or contractionary policy in response to a positive cost-push shock.

Domaines: Economies et finances

Romain Baeriswyl, Camille Cornand. Optimal Monetary Policy in Response to Supply Inflation : the Impact of Central Bank Communication. International Journal of Central Banking, 2010, 6 (2), pp. 31-52. ⟨halshs-01704183⟩