Staff Working Paper No. 1,007
By Vania Esady
How do varying degrees of information frictions affect the transmission mechanism of monetary policy? Using non‑linear methods, I empirically find that during heightened disagreement, monetary policy has a smaller effect on inflation, yet more influence over output. As a proxy for information frictions, I use real GDP nowcast disagreement across professional forecasters. Significant nowcast disagreement indicates when it is difficult to observe the current economic state, or a period of high information rigidities. I develop a tractable theoretical model that shows rationally inattentive price‑setters produce this result. Improved central bank communication that reduces disagreement among economic agents can mitigate output losses when implementing disinflationary monetary policies.