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The loss from uncertainty on policy targets

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  • Di Giorgio, Giorgio
  • Traficante, Guido

Abstract

What is the welfare loss arising from uncertainty about true policy targets? We quantify these effects in a DSGE model where private agents are unable to distinguish between temporary shocks to potential output and to the inflation target. Agents use optimal filtering techniques to construct estimates of the unknown variables. We find that the welfare costs of not observing the inflation target and potential output are relevant even in the case of a small measurement error. We also show that, in our framework, uncertainty about the inflation target is more costly than uncertainty about potential output.

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Bibliographic Info

Article provided by Elsevier in its journal Economic Modelling.

Volume (Year): 30 (2013)
Issue (Month): C ()
Pages: 175-182

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Handle: RePEc:eee:ecmode:v:30:y:2013:i:c:p:175-182

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Web page: http://www.elsevier.com/locate/inca/30411

Related research

Keywords: Monetary policy; Kalman filter; Potential output;

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Blog mentions

As found by EconAcademics.org, the blog aggregator for Economics research:
  1. The welfare gain from inflation targeting
    by Economic Logician in Economic Logic on 2011-07-13 14:29:00

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