INFORMATIONAL ADVANTAGE, EXOGENOUS VARIABILITY, AND ECONOMIC WELFARE - CAN THE INFORMATIONAL ADVANTAGE OF THE POLICY-MAKER REDUCE WELFARE

This paper provides an example of a situation in which an increase in the precision of the policymaker's information does not necessarily improve economic welfare. This result arises in a model of time-consistent monetary policy using the feedback rule on a currently observable variable. In the model, the policymaker will always be inclined to use this feedback rule in order to reduce undesirable disturbances. However, using the feedback rule will change the slope of the supply function and will affect the temptation of the policymaker to cheat the public. As a result, better information of the policymaker increases the degree of feedback and might reduce economic welfare.