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Ambiguous Policy Announcements

Claudio Michelacci and Luigi Paciello ()
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Claudio Michelacci: EIEF and CEPR

No 1701, EIEF Working Papers Series from Einaudi Institute for Economics and Finance (EIEF)

Abstract: We study the effects of an announcement of a future shift in monetary policy when agents face Knightian uncertainty about the commitment capacity of the monetary authority. Households are ambiguity-averse and are differentially exposed to inflation due to differences in wealth. In response to the announcement of a future loosening in monetary policy, only wealthy households (creditors) will act as if the announcement will be fully implemented, due to the potential loss of wealth from the prospective policy easing.And when creditors believe the announcement more than debtors, their expected wealth losses are larger than the wealth gains that debtors expect. Hence the economy responds as if aggregate net wealth falls, which attenuates the effects of the announcement. We study the quantitative properties of the model in a liquidity trap after allowing for a realistic characterization of households’ wealth portfolio.

New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2017, Revised 2017-12
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