Partially Anticipated Monetary Policy Shocks – Are They Stabilizing or Destabilizing?

Abstract

Abstract This paper uses a dynamic framework of a small open economy to study the volatility effects of partially anticipated monetary policy shocks in which the public has imperfect information about the size and/or the timing of the future expansionary policy intervention. Our two main results are as follows: (i) Partially anticipated monetary policy shocks may be stabilizing, i. e. lead to a lower volatility than a fully anticipated monetary policy shock of the same form. (ii) However, we typically obtain a trade off in volatilities such that a simultaneous stabilization of inflation and output is not possible. If the public underestimates (overestimates) the size of the shock, output (inflation) may be stabilized. Our results imply that the central bank may have an incentive to withhold information from the public about the true central bank’s intention.