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Policy announcements and welfare

  • Christian A. Stoltenberg


    (University of Amsterdam)

  • Vadym Lepetyuk


    (Universidad de Alicante)

In the presence of idiosyncratic risk, the public revelation of information about uncertain aggregate outcomes such as policy choices can be detrimental to social welfare. By announcing informative signals on non-insurable aggregate risk, the policy maker distorts agents¿ insurance incentives and increases the riskiness of the optimal allocation that is feasible in self-enforceable arrangements. As an application, we consider a monetary authority that may reveal changes in the inflation target, and document that the negative effect of distorted insurance incentives can very well dominate conventional effects in favor for the release of better information.

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Paper provided by Instituto Valenciano de Investigaciones Económicas, S.A. (Ivie) in its series Working Papers. Serie AD with number 2009-13.

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Length: 42 pages
Date of creation: Jan 2009
Date of revision:
Publication status: Published by Ivie
Handle: RePEc:ivi:wpasad:2009-13
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