TY - JOUR
T1 - An explanation for the price puzzle
T2 - Asymmetric information and expectation dynamics
AU - Tas, Bedri Kamil Onur
PY - 2011/6
Y1 - 2011/6
N2 - Using theoretical and empirical analyses, this paper shows that the expectation dynamics induced by information asymmetry between the Central Bank (CB) and the public can cause the price puzzle. The signalling and learning dynamics between the CB and a representative private-sector agent under asymmetric information is investigated. Inflation positively reacts to contractionary monetary policy because the change in the interest rate is perceived as a signal of the CB's private information about higher future inflation and output by the public. The empirical section of the paper validates this theoretical argument using a VAR specification about the US economy. Besides providing an explanation for the price puzzle, the results of this paper has practical implications about transparency and monetary policy. The theoretical and empirical findings indicate that asymmetric information causes significant frictions in the transmission mechanism of monetary policy. These frictions induce short-run undesired effects like increase in expected inflation and actual inflation as a response to contractionary monetary policy which is identified as "the price puzzle"
AB - Using theoretical and empirical analyses, this paper shows that the expectation dynamics induced by information asymmetry between the Central Bank (CB) and the public can cause the price puzzle. The signalling and learning dynamics between the CB and a representative private-sector agent under asymmetric information is investigated. Inflation positively reacts to contractionary monetary policy because the change in the interest rate is perceived as a signal of the CB's private information about higher future inflation and output by the public. The empirical section of the paper validates this theoretical argument using a VAR specification about the US economy. Besides providing an explanation for the price puzzle, the results of this paper has practical implications about transparency and monetary policy. The theoretical and empirical findings indicate that asymmetric information causes significant frictions in the transmission mechanism of monetary policy. These frictions induce short-run undesired effects like increase in expected inflation and actual inflation as a response to contractionary monetary policy which is identified as "the price puzzle"
KW - Asymmetric information
KW - Kalman filter
KW - Learning
KW - Monetary policy
KW - Price puzzle
KW - VAR models
UR - http://www.scopus.com/inward/record.url?scp=79953054371&partnerID=8YFLogxK
UR - http://www.scopus.com/inward/citedby.url?scp=79953054371&partnerID=8YFLogxK
U2 - 10.1016/j.jmacro.2010.10.005
DO - 10.1016/j.jmacro.2010.10.005
M3 - Article
AN - SCOPUS:79953054371
SN - 0164-0704
VL - 33
SP - 259
EP - 275
JO - Journal of Macroeconomics
JF - Journal of Macroeconomics
IS - 2
ER -