Beliefs formation and the puzzle of forward guidance power

Elton Beqiraj, Giovanni Di Bartolomeo () and Marco Di Pietro ()

Journal of Macroeconomics, 2019, vol. 60, issue C, 20-32

Abstract: We study the extent to which the belief-formation process affects the dynamics of macroeconomic variables when the central bank uses forward guidance. Recent literature has emphasized two kinds of puzzle associated to forward guidance. First, standard sticky-price models imply that far future forward guidance has huge and implausible effects on current outcomes, these effects grow in its horizon. Second, these models tend to overestimate the effects of central bank’s commitment to keep interest rate below the natural rate for a given period of time. Focusing on the former puzzle, by a parsimonious macro-model that allows for the role of bounded rationality and heterogeneous agents, we obtain tempered responses for both real and nominal variables.

Keywords: Forward guidance power; Heterogeneous agents; Bounded rationality; Monetary policy; Announcements (search for similar items in EconPapers)
JEL-codes: E21 E40 E50 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0164070418302349
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Beliefs formation and the puzzle of forward guidance power (2017)
Working Paper: Beliefs formation and the puzzle of forward guidance power (2017)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:jmacro:v:60:y:2019:i:c:p:20-32

DOI: 10.1016/j.jmacro.2019.01.001

Access Statistics for this article

Journal of Macroeconomics is currently edited by Douglas McMillin and Theodore Palivos

More articles in Journal of Macroeconomics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().