On the Optimality of Delay in 'Monetary Policy as aProcess of Search'
Caplin & Leahy (1996) show that, when central bankers learn about theeconomy by observing its response to policy shock, cautious monetary policymay be ineffectual as private agents correctly anticipate that today's interestrate cuts are likely to be followed by future cuts. The central banker has toaccount for this strategic response of private agents to small interest rate cutsby acting more aggressively than would otherwise be the case. Caplin & Leahy,however, do not examine whether or not this strategic behavior on the partof private agents represents a constraint on the ability of monetary policy toimplement optimal investment outcomes. The purpose of this paper is to showthat the kinds of strategic interactions between investors and the central bankerhighlighted by Caplin and Leahy affect only the policy rule and do not influencethe investment outcome in equilibrium.[...]
E50 - Monetary Policy, Central Banking and the Supply of Money and Credit. General ; Strategic management ; Specific management methods ; Individual Working Papers, Preprints ; No country specification