scholarly journals Forward Guidance without Common Knowledge

2018 ◽  
Vol 108 (9) ◽  
pp. 2477-2512 ◽  
Author(s):  
George-Marios Angeletos ◽  
Chen Lian
Keyword(s):  
General Equilibrium ◽  
Common Knowledge ◽  
Feedback Loops ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Aggregate Level ◽  
Standard Practice ◽  
Forward Guidance ◽  
Keynesian Model ◽  
Forward Looking

How does the economy respond to news about future policies or future fundamentals? Standard practice assumes that agents have common knowledge of such news and face no uncertainty about how others will respond. Relaxing this assumption attenuates the general equilibrium effects of news and rationalizes a form of myopia at the aggregate level. We establish these insights within a class of games which nests, but is not limited to, the New Keynesian model. Our results help resolve the forward-guidance puzzle, offer a rationale for the front-loading of fiscal stimuli, and illustrate more broadly the fragility of predictions that rest on long series of forward-looking feedback loops. (JEL D82, D83, D84, E12, E23, E52, E62)

scholarly journals The effect of central bank credibility on forward guidance in an estimated New Keynesian model

2021 ◽  
pp. 1-39
Author(s):  
Stephen J. Cole ◽  
Enrique Martínez-García
Keyword(s):  
Central Bank ◽  
Rational Expectations ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Survey Of Professional Forecasters ◽  
Forward Guidance ◽  
Keynesian Model ◽  
The Us ◽  
Imperfect Credibility ◽  
Central Bank Credibility

Abstract This paper examines the effectiveness of forward guidance shocks in the US. We estimate a New Keynesian model with imperfect central bank credibility and heterogeneous expectations using Bayesian methods and survey data from the Survey of Professional Forecasters (SPF). The results provide important takeaways: (1) The estimated credibility of the Fed’s forward guidance announcements is relatively high, but anticipation effects are attenuated. Accordingly, output and inflation do not respond as favorably as in the fully credible counterfactual. (2) The so-called “forward guidance puzzle” arises partly from the unrealistically large responses of macroeconomic variables to forward guidance under perfect credibility and homogeneous fully informed rational expectations, assumptions which are found to be jointly inconsistent with the observed US data. (3) Imperfect credibility provides a plausible explanation for the empirical evidence of forecasting error predictability based on forecasting disagreement found in the SPF data. Thus, we show that accounting for imperfect credibility and forecasting disagreements is important to understand the formation of expectations and the transmission mechanism of forward guidance.

scholarly journals Optimal Forward Guidance

2019 ◽  
Vol 11 (4) ◽  
pp. 310-345 ◽  
Author(s):  
Florin O. Bilbiie
Keyword(s):  
Interest Rates ◽  
Dynamic Stochastic General Equilibrium ◽  
Bad News ◽  
New Keynesian ◽  
Simple Rule ◽  
New Keynesian Model ◽  
Liquidity Trap ◽  
Forward Guidance ◽  
Keynesian Model ◽  
Dynamic Stochastic

Optimal forward guidance is the simple policy of keeping interest rates low for some optimally determined number of periods after the liquidity trap ends and moving to normal-times optimal policy thereafter. I solve for the optimal duration in closed form in a new Keynesian model and show that it is close to fully optimal Ramsey policy. The simple rule “announce a duration of half of the trap’s duration times the disruption” is a good approximation, including in a medium-scale dynamic stochastic general equilibrium (DSGE) model. By anchoring expectations of Delphic agents (who mistake commitment for bad news), the simple rule is also often welfare-preferable to Odyssean commitment. (JEL D84, E12, E43, E52, E56)

scholarly journals Forward Guidance and Heterogeneous Beliefs

2019 ◽  
Vol 11 (3) ◽  
pp. 1-29 ◽  
Author(s):  
Philippe Andrade ◽  
Gaetano Gaballo ◽  
Eric Mengus ◽  
Benoît Mojon
Keyword(s):  
Economic Activity ◽  
Central Banks ◽  
Heterogeneous Beliefs ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Survey Of Professional Forecasters ◽  
Forward Guidance ◽  
Keynesian Model ◽  
Guidance Policy ◽  
The Cost

Central banks’ announcements that rates are expected to remain low could signal either a weak macroeconomic outlook, which would slow expenditures, or a more accommodative stance, which may stimulate economic activity. We use the Survey of Professional Forecasters to show that, when the Fed gave guidance between 2011:III and 2012:IV, these two interpretations coexisted despite a consensus on low expected rates. We rationalize these facts in a New-Keynesian model where heterogeneous beliefs introduce a trade-off in forward guidance policy: leveraging on the optimism of those who believe in monetary easing comes at the cost of inducing excess pessimism in non-believers. (JEL D83, E12, E43, E52, E58, E65)

scholarly journals A Behavioral New Keynesian Model

2020 ◽  
Vol 110 (8) ◽  
pp. 2271-2327 ◽  
Author(s):  
Xavier Gabaix
Keyword(s):  
Price Level ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Rational Model ◽  
Fiscal Stimulus ◽  
Forward Guidance ◽  
Keynesian Model ◽  
Long Run ◽  
Short Run ◽  
Monetary And Fiscal Policy

This paper analyzes how bounded rationality affects monetary and fiscal policy via an empirically relevant enrichment of the New Keynesian model. It models agents’ partial myopia toward distant atypical events using a new microfounded “cognitive discounting” parameter. Compared to the rational model, (i) there is no forward guidance puzzle; (ii) the Taylor principle changes: with passive monetary policy but enough myopia equilibria are determinate and economies stable; (iii) the zero lower bound is much less costly; (iv) price-level targeting is not optimal; (v) fiscal stimulus is effective; (vi) the model is “ neo-Fisherian” in the long run, Keynesian in the short run. (JEL E12, E31, E43, E52, E62, E70)

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