In a setting with dispersed information, monopolistic competition and sticky-prices, a policy authority uncertain about the monetary transmission mechanism reacts prudently to supply shocks. This induces producers to ascribe an excessive importance to their private information when setting...

This paper studies optimal policy in a business-cycle setting in which firms have a blurry understanding of the state of the economy due to informational or cognitive constraints. The latter are not only the source of nominal rigidity but also an impediment in the coordination of production. The...