Ambiguous Policy Announcements

Abstract

We study the effects of monetary announcements when agents face Knightian uncertainty about the commitment capacity of the monetary authority. Households are ambiguity averse and differentially exposed to inflation due to differences in wealth. In response to the announcement of a future monetary loosening, only wealthy households (creditors) act as if the announcement will be fully implemented, due to the potential wealth losses from future inflation. As a result the economy responds as if aggregate net wealth falls, which attenuates the effects of the announcement. Redistributing from super-wealthy to middle-wealthy households makes the announcement more expansionary, in the extreme as expansionary as under a fully credible announcement.

Redistribution and Fiscal Uncertainty Shocks

“…I apply their method to a New Keynesian environment with heterogeneous households who are ambiguity averse. Michelacci and Paciello (2017) consider the impact of imperfectly credible monetary policy announcements in a New Keynesian model where, as in Ilut et al (2016), households are ambiguity averse and have heterogeneous net financial wealth. In their paper, the announcement of a future policy loosening could lead to a contraction due to the perceived negative income effect because the economy behaves as if the aggregate net worth is lower.…”

Can more public information raise uncertainty? The international evidence on forward guidance

“…For example Melosi (2017, 2018);Kiley (2016);Michelacci and Paciello (2017).ECB Working Paper Series No 2263 / April 2019…”

Untitled

“…Other relevant contributions are Ferrière and Karantounias (2019), who study distortionary taxation and the design of utility-providing government consumption when there is ambiguity about the business cycle, and Benigno and Paciello (2014), who study the implications of ambiguity aversion of the representative consumer and the policymaker for the design of opti-mal monetary policy. Michelacci and Paciello (2019) associate the credibility of the monetary authority actions to the worst-case beliefs of a heterogenous private sector. Orlik and Presno (2018) follow the type 0 ambiguity assumptions of Karantounias (2013) and deviate from the commitment assumption by using the notion of sustainable plans.…”