Forward Guidance and Heterogeneous Beliefs

Gaetano Gaballo, Philippe Andrade, Eric Mengus and Benoit Mojon

No 12650, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Central banks' announcements that future rates are expected to remain low for some time could signal either a weak macroeconomic outlook - which is bad news - or a more accommodative policy stance - which is good news. We use the Survey of Professional Forecasters to show that, when the Fed gave date-based forward guidance between 2011Q3 and 2012Q4, these two interpretations coexisted despite a consensus that rates would stay low for long. We rationalize these facts in an otherwise standard New-Keynesian model where agents: (i) are uncertain about the length of the trap, (ii) have different priors on the commitment ability of the central bank, and (iii) perceive central bank announcements of expected rates as accurate. This heterogeneity of beliefs introduces a trade-off in forward guidance policy: leveraging on the optimism of those who believe the central bank can commit comes at the cost of inducing excess pessimism in non-believers. When pessimistic views prevail, forward guidance can even be detrimental.

Keywords: Signaling channel; Disagreement; Optimal policy; Zero lower bound; Survey forecasts (search for similar items in EconPapers)
JEL-codes: E31 E52 E65 (search for similar items in EconPapers)
Date: 2018-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

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Related works:
Journal Article: Forward Guidance and Heterogeneous Beliefs (2019)
Working Paper: Forward guidance and heterogeneous beliefs (2018)
Working Paper: Forward Guidance and Heterogeneous Beliefs (2016)
Working Paper: Forward guidance and heterogenous beliefs (2016)
Working Paper: Forward Guidance and Heterogeneous Beliefs (2015)
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