Policy Announcements and Welfare
We are especially thankful to Harald Uhlig, Patrick Kehoe, Wouter den Haan, V.V. Chari, Leo Kaas, Dirk Krueger, Fabrizio Perri, Itzhak Zilcha and seminar participants at the Federal Reserve Bank of New York, the Federal Reserve Bank of Minneapolis, Universiteit van Amsterdam, Universidad de Alicante, Rutgers, the University of Iowa and at the University of Toronto. Vadym Lepetyuk gratefully acknowledges the financial support from the Spanish Ministerio de Educación y Ciencia, IVIE and FEDER funds under project SEJ2007-62656. Christian Stoltenberg thanks the Federal Reserve Bank of Minneapolis for generous financial support and hospitality.
We show that in the presence of idiosyncratic risk, the public revelation of information about risky aggregate outcomes such as policy choices can have a welfare-reducing effect. By announcing information on non-insurable aggregate risk, the policy maker distorts households’ incentives for insurance of idiosyncratic risk and increases the riskiness of the optimal self-enforceable allocation. The negative effect of distorted insurance incentives can be quantitatively important for a monetary authority that reveals changes in its short-run inflation target. We characterise parameters for which the effect dominates conventional effects that favour releasing better information.