Mitigating the forward guidance puzzle: inattention, credibility, finite planning horizons and learning

Oliver de Groot and Falk Mazelis

No 2426, Working Paper Series from European Central Bank

Abstract: This paper develops a simple, consistent methodology for generating empirically realistic forward guidance simulations using existing macroeconomic models by modifying expectations about policy announcements. The main advantage of our method lies in the exact preservation of all other shock transmissions. We describe four scenarios regarding how agents incorporate information about future interest rate announcements: “inattention”, “credibility”, “finite planning horizon”, and “learning”. The methodology consists of describing a single loading matrix that augments the equilibrium decision rules and can be applied to any standard DSGE, including large-scale policy-institution models. Finally, we provide conditions under which the forward guidance puzzle is resolved. JEL Classification: C63, E32, E52

Keywords: expectations; monetary policy; unconventional policy (search for similar items in EconPapers)
Date: 2020-06
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-ore
Note: 2712344
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20202426

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