The Federal Reserve Board eagle logo links to home page  Finance
and Economics Discussion Series: 2010-11 Screen Reader version
Managing Beliefs about Monetary Policy under Discretion  Elmar
Mertens August 2009  Keywords: Optimal monetary policy,
discretion, time-consistent policy, Markov-perfect equilibrium,
incomplete information, Kalman filter   In models of monetary
policy, discretionary policymaking often lacks the ability to
manage public beliefs, which explains the theoretical appeal of
policy rules and commitment strategies. But as shown in this
paper, when a policymaker possesses private information, belief
management becomes an integral part of optimal discretion
policies and improves their performance.  Solving for optimal
policy in a simple New Keynesian model, this paper shows how
discretionary losses are reduced when the policymaker has
private information. Furthermore, disinflations are pursued more
vigorously, when the hidden information problem is larger, even
when inflation is partly backwa