Essays in Monetary Policy With Informational Frictions

Abstract

This dissertation presents three essays addressing the role of informational frictions in monetary policy. In particular, motivated by the observation that central banks around the world are often concerned about their reputation for knowledgeability, I study why this might be the case and how this affects how central banks set monetary policy. In the first essay, “Perceptions of Competence: Monetary Policy and the Reputational Accelerator,” I characterize the role that perceptions of a central bank’s knowledgeability play in affecting monetary policy’s ability to stabilize aggregate outcomes. In the second essay, “Monetary Policy Reversal Aversion,” I analyze the monetary policy distortions that might arise when central banks care about their reputation for knowledgeability. The third and last essay, “Perceptions of Central Bank Knowledgeability and the Signaling Channel: An Empirical Analysis,” empirically tests for the novel mechanisms outlined in the first essay, providing evidence that perceptions of central bank knowledgeability can affect the transmission of monetary policy. Together, these essays shed light on the unanswered questions of how the public’s uncertainty of the central bank’s ability to read and understand the economy affects aggregate economic outcomes and the way central banks set monetary policy, and why central banks might care about their reputation for knowledgeability in the first place.