The Return of Greenspan: Mumbling with Great Incoherence

15:30-17:00, Friday, March 18, 2022

Tencent Meeting (Meeting ID: 744 591 685)

Dr. Renbin ZHANG is the assistant professor of School of Economics, Shandong University. He was granted the Ph.D. in Economics from Universitat Autònoma de Barcelona & Barcelona GSE in 2020. Dr. Renbin ZHANG's research interests lie at the Macro Economics and Macro Finance, etc. His research works have been published in Journal of Monetary Economics.

The conventional wisdom views a reduced aggregate noise as welfare improving. This paper demonstrates that increased transparency regarding the unobserved state of the economy might reduce social welfare due to the presence of nominal rigidity, which gives rise to costly price dispersions. On the one hand, business cycle fluctuations and price dispersions arising from nominal rigidity are muted in a noisy economy. On the other hand, an economy with less transparency suffers from efficiency losses due to inefficient coordination in production and pricing decisions. The optimal central bank communication balances the gain from increased efficiency with the cost of higher price dispersions due to nominal rigidity. Monetary policy affects the tradeoff, and thus interact with the communication policy. We characterize the conditions under which a more transparent central bank communication reduces social welfare. A dynamic quantitative model demonstrates that a central bank that mumbles with great incoherence is optimal.

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