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The loss from uncertainty on policy targets

  • Di Giorgio, Giorgio
  • Traficante, Guido

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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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/30411

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  1. Svensson, Lars E. O. & Woodford, Michael, 2001. "Indicator Variables for Optimal Policy under Asymmetric Information," Seminar Papers 689, Stockholm University, Institute for International Economic Studies.
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  9. Alex Cukierman & Francesco Lippi, 2004. "Endogenous monetary policy with unobserved potential output," Temi di discussione (Economic working papers) 493, Bank of Italy, Economic Research and International Relations Area.
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  13. Camille Cornand, 2006. "Optimal Degree of Public Information Dissemination," Post-Print halshs-00137519, HAL.
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  17. Lombardo, Giovanni & Vestin, David, 2007. "Welfare implications of Calvo vs. Rotemberg pricing assumptions," Working Paper Series 0770, European Central Bank.
  18. Athanasios Orphanides, 1998. "Monetary policy rules based on real-time data," Finance and Economics Discussion Series 1998-03, Board of Governors of the Federal Reserve System (U.S.).
  19. Glenn D. Rudebusch & John C. Williams, 2006. "Revealing the Secrets of the Temple: The Value of Publishing Central Bank Interest Rate Projections," NBER Working Papers 12638, National Bureau of Economic Research, Inc.
  20. Nistico, Salvatore, 2007. "The welfare loss from unstable inflation," Economics Letters, Elsevier, vol. 96(1), pages 51-57, July.
  21. Harvey, Andrew & Snyder, Ralph D., 1990. "Structural time series models in inventory control," International Journal of Forecasting, Elsevier, vol. 6(2), pages 187-198, July.
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