Monetary nonneutrality hard to explain

Imperfect information cannot explain the substantial degree of monetary nonneutrality, where money affects real variables, finds new research from the Bank of Canada.

The research shows that firms observe and learn from market signals, and that market signals tend to coordinate firms' price decisions. This means that the costly updating of information becomes less frequent and the accuracy of forecasting competitor's prices improves. The analysis finds that better forecasting accuracy in turns

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