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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.

Suggested Citation

  • Di Giorgio, Giorgio & Traficante, Guido, 2013. "The loss from uncertainty on policy targets," Economic Modelling, Elsevier, vol. 30(C), pages 175-182.
  • Handle: RePEc:eee:ecmode:v:30:y:2013:i:c:p:175-182 DOI: 10.1016/j.econmod.2012.08.006
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    More about this item

    Keywords

    Monetary policy; Kalman filter; Potential output;

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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