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Policy Announcements and Welfare

Abstract

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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File URL: http://www.nbp.pl/publikacje/materialy_i_studia/65_en.pdf
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Paper provided by Narodowy Bank Polski, Economic Research Department in its series NBP Working Papers with number 65.

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Length: 63
Date of creation: 2009
Handle: RePEc:nbp:nbpmis:65
Note: The paper was presented at the National Bank of Poland’s conference “Publishing Central Bank Forecast in Theory and Practice” held on 5–6 November 2009 in Warsaw.
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Keywords: Social value of information; policy announcements; monetary policy; transparency;

Other versions of this item:

Find related papers by JEL classification:
  • D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty
  • D86 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Economics of Contract Law
  • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
  • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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Cited by:

  1. Sonia Oreffice & Climent Quintana, 2009. "Anthropometry and Socioeconomics in the Couple: Evidence from the PSID," Working Papers 2009-22, FEDEA.
  2. Fazio, Dimas M. & Tabak, Benjamin M. & Cajueiro, Daniel O., 2015. "Inflation targeting: Is IT to blame for banking system instability?," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 76-97.
  3. Piotr Denderski & Christian Stoltenberg, 2015. "On Positive Value of Information in Risk Sharing," Tinbergen Institute Discussion Papers 15-074/VI, Tinbergen Institute.

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