Two Roles for Monetary Policy when the Asset Market is Incomplete and Information is Asymmetric

I construct and analyze an example of an economy with production and money under conditions of uncertainty, asymmetric information, and an incomplete asset market. For alternative scenarios, which differ in the information available to consumers and firms, I compute the equilibrium prices and allocations, and I explicitly display the associated indeterminacy. I argue that monetary policy can he effective (i) by modifying the structure of payoffs of assets and (ii) by modifying the information conveyed by prices.