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Ambiguous Policy Announcements

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  • Claudio Michelacci
  • Luigi Paciello

Abstract

We study the effects of monetary announcements when agents face Knightian uncertainty about the commitment capacity of the monetary authority. Households are ambiguity averse and differentially exposed to inflation due to differences in wealth. In response to the announcement of a future monetary loosening, only wealthy households (creditors) act as if the announcement will be fully implemented, due to the potential wealth losses from future inflation. As a result the economy responds as if aggregate net wealth falls, which attenuates the effects of the announcement. Redistributing from super-wealthy to middle-wealthy households makes the announcement more expansionary, in the extreme as expansionary as under a fully credible announcement.

Suggested Citation

  • Claudio Michelacci & Luigi Paciello, 2020. "Ambiguous Policy Announcements," Review of Economic Studies, Oxford University Press, vol. 87(5), pages 2356-2398.
  • Handle: RePEc:oup:restud:v:87:y:2020:i:5:p:2356-2398.
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    File URL: http://hdl.handle.net/10.1093/restud/rdz062
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    Cited by:

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    2. Barthélemy, Jean & Mengus, Eric, 2018. "The signaling effect of raising inflation," Journal of Economic Theory, Elsevier, vol. 178(C), pages 488-516.

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    Keywords

    Ambiguity; Forward guidance;

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