A0305
Title: Asymmetric information, two-way learning, and the Fed information effect
Authors: Zhao Han - College of William and Mary (United States) [presenting]
Chengcheng Jia - Federal Reserve Bank of Cleveland (United States)
Abstract: The causes and consequences of the Fed information effect are studied. A simple analytical model is first used to show that under asymmetric information, monetary policy surprises (MPSs) correlate with the unobserved state of the economy. The correlation implies that MPSs provide information about the state of the economy, but a reduced form estimation of the information effect may be biased. A structural new Keynesian model is then developed to gauge the magnitude of asymmetric information. Under the calibration, the central bank does not have superior real-time information compared to the private sector. Over time, a two-way learning mechanism between the central bank and the private sector mitigates the information friction and generates a meaningful information effect. Asymmetric information causes amplified output dynamics, and the Fed information effect leads to hump-shaped inflation responses to aggregate demand shocks, both of which contribute to a flattened Phillip's curve.
