Comment on Amato and Shin's “Public and Private Information in Monetary Policy Models”

amsh303.texComment on Je ffrey D. Amato and Hyun Song Shin1“Public and Private Information in Monetary Policy Models”Lars E.O. Svenssonwww.princeton.edu/ ∼svenssonMarch 2003Je ff Amato and Hyun Shin have produced a very fine paper, Amato and Shin [1]. It isa pleasure to discuss it. The main message is that central-bank information may have badconsequences. It could degrade the information value of private signals, and it could increasethe volatility of inflation. This makes the paper something of an anti-transparency paper, asomewhat rare thing in this age of central-banking transparency. However, I do not believe thatthe anti-transparency flavor stands up to scrutiny. Indeed, I will argue that the paper’s mainresult can rather be interpreted as a pro-transparency one.The paper discusses di fficult issues with the help of a very elegant and powerful framework,modeling di fferential information with the help of Markov chains and related matrix algebra.First, the authors provide a simple static example of their analysis. Then they provide a moreelaborate intertemporal model of a newkeynesian model of a monetary economy.Inthesimpleexample,atypicalfirm i ( i=1 ,2,.. .,N) sets the (log) price p of its productiaccording toi ip =E p+ ξE ( y − y¯) , (0.1)iiwhere E denotes the firm’s expectation or estimate conditional on its private information;P N1p ≡ p denotes the aggregate (log) price level; ξ (0 <ξ<1) is a parameter; and y − y¯ii=1Ndenotes the output gap, the di ...