Ambiguous Policy Announcements

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. Re-distributing from super-wealthy to middle-wealthy households makes the announcement more expansionary, in the extreme as expansionary as under a fully credible announcement.

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