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The loss from uncertainty on policy targets

  • Giorgio Di Giorgio

    ()

    (LUISS Guido Carli University)

  • Guido Traficante

    ()

    (Universita' Europea di Roma and LUISS Guido Carli University)

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 inßation target. Agents use optimal Þltering techniques to construct estimates of the unknown variables. We Þnd that the welfare costs of not observing the inßation 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 inßation target is more costly than uncertainty about potential output.

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Paper provided by Dipartimento di Economia e Finanza, LUISS Guido Carli in its series Working Papers CASMEF with number 1104.

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Date of creation: 2011
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Handle: RePEc:lui:casmef:1104
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