International Economics Commons^™

Monetary Policy Games, Instability And Incomplete Information, Somnath Sen Professor

Somnath Sen

Abstract: Central banks, in executing monetary policy, while pursuing traditional objectives, such as the control of inflation, may try also to promote financial stability. In this paper, we explore a simple monetary policy game played between the central bank and the financial sector. The central bank can be of two types, one traditional and the other concerned with controlling the financial markets; however, the financial sector is unsure which, due to incomplete information. The conclusion of the paper is that for small shocks to inflation there is a pooling equilibrium, whereas for larger shocks there is separation. In the latter …