- Policy announcements and welfare
- Number of pages
- Amsterdam: Faculteit Economie en Bedrijfskunde
- Document type
- Working paper
- Faculty of Economics and Business (FEB)
- Amsterdam School of Economics Research Institute (ASE-RI)
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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