The loss from uncertainty on policy targets

Giorgio Di Giorgio and Guido Traficante

Economic Modelling, 2013, vol. 30, issue C, 175-182

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 inflation target. Agents use optimal filtering techniques to construct estimates of the unknown variables. We find that the welfare costs of not observing the inflation 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 inflation target is more costly than uncertainty about potential output.

Keywords: Monetary policy; Kalman filter; Potential output (search for similar items in EconPapers)
JEL-codes: E37 E5 E52 E58 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: The loss from uncertainty on policy targets (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:30:y:2013:i:c:p:175-182

DOI: 10.1016/j.econmod.2012.08.006

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