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Policy Announcements and Welfare

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 National Bank of Poland, Economic Institute in its series National Bank of Poland Working Papers with number 65.

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Length: 63
Date of creation: 2009
Date of revision:
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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Web page: http://www.nbp.pl/Homen.aspx?f=/en/publikacje/materialy_i_studia/informacja_en.html

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