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.
Policy Announcements and Welfare
Article first published online: 4 APR 2013
© 2013 The Author(s). The Economic Journal © 2013 Royal Economic Society
The Economic Journal
Volume 123, Issue 571, pages 962–997, September 2013
How to Cite
Lepetyuk, V. and Stoltenberg, C. A. (2013), Policy Announcements and Welfare. The Economic Journal, 123: 962–997. doi: 10.1111/ecoj.12024
- Issue published online: 18 SEP 2013
- Article first published online: 4 APR 2013
- Accepted manuscript online: 29 DEC 2012 12:39PM EST
- Manuscript Accepted: 20 NOV 2012
- Manuscript Received: 12 JAN 2012
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.