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The loss from uncertainty on policy targets

Author

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  • Giorgio Di Giorgio

    () (LUISS Guido Carli University)

  • Guido Traficante

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

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 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.

Suggested Citation

  • Giorgio Di Giorgio & Guido Traficante, 2011. "The loss from uncertainty on policy targets," Working Papers CASMEF 1104, Dipartimento di Economia e Finanza, LUISS Guido Carli.
  • Handle: RePEc:lui:casmef:1104
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    References listed on IDEAS

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    1. The welfare gain from inflation targeting
      by Economic Logician in Economic Logic on 2011-07-13 19:29:00

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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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