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Ambiguous Policy Announcements

Author

Listed:
  • Claudio Michelacci

    (EIEF and CEPR)

  • Luigi Paciello

    (EIEF and CEPR)

Abstract

We study the effects of an announcement of a future shift in monetary policy when agents face Knightian uncertainty about the commitment capacity of the monetary authority. Households are ambiguity-averse and are differentially exposed to inflation due to differences in wealth. In response to the announcement of a future loosening in monetary policy, only wealthy households (creditors) will act as if the announcement will be fully implemented, due to the potential loss of wealth from the prospective policy easing.And when creditors believe the announcement more than debtors, their expected wealth losses are larger than the wealth gains that debtors expect. Hence the economy responds as if aggregate net wealth falls, which attenuates the effects of the announcement. We study the quantitative properties of the model in a liquidity trap after allowing for a realistic characterization of households’ wealth portfolio.

Suggested Citation

  • Claudio Michelacci & Luigi Paciello, 2017. "Ambiguous Policy Announcements," EIEF Working Papers Series 1701, Einaudi Institute for Economics and Finance (EIEF), revised Dec 2017.
  • Handle: RePEc:eie:wpaper:1701
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