A Theory of Fed Watching in a Macroeconomic Policy Game

Abstract

This paper examines the phenomenon of "Fed watching" within the context of a macroeconomic policy game. Following A. Cukierman and A. H. Meltzer's 1986 article, the policymaker's preferences are private information and noisy monetary control causes past observations of money growth to be a noisy signal of the monetary authority's future intentions. Individuals are allowed to acquire additional information about the monetary authority's preferences. Thus, both past observations of money growth and costly information about the policymaker's preferences are used by agents in forming expectations about policy. The public's acquisition of information alters the monetary authority's strategic calculus, making noisy monetary control less desirable. Copyright 1992 by Economics Department of the University of Pennsylvania and the Osaka University Institute of Social and Economic Research Association.

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