Credible Forward Guidance

Quentin Batista, Taisuke Nakata and Takeki Sunakawa

Journal of Economic Dynamics and Control, 2023, vol. 153, issue C

Abstract: How can the central bank credibly implement a “lower-for-longer” strategy? To answer this question, we analyze a series of optimal sustainable policy problems—indexed by the duration of reputational loss—in a sticky-price model with an effective lower bound (ELB) constraint on nominal interest rates. We find that, even when the central bank lacks commitment, the central bank can still credibly keep the policy rate at the ELB for an extended period—though not as extended as under the optimal commitment policy—and meaningfully mitigate the adverse effects of the ELB constraint on economic activity.

Keywords: Credibility; Effective lower bound; Forward guidance; Sustainable plan; Time-Consistency (search for similar items in EconPapers)
JEL-codes: E32 E52 E61 E62 E63 (search for similar items in EconPapers)
Date: 2023
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Related works:
Working Paper: Credible Forward Guidance (2022)
Working Paper: Credible Forward Guidance (2020)
Working Paper: Credible Forward Guidance (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:153:y:2023:i:c:s0165188923001057

DOI: 10.1016/j.jedc.2023.104699

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