Forward Guidance

Marcus Hagedorn, Jinfeng Luo (), Iourii Manovskii and Kurt Mitman

Working Papers from eSocialSciences

Abstract: The paper assesses the power of forward guidance—promises about future interest rates—as a monetary tool in a liquidity trap using a quantitative incomplete-markets model. The results suggest the effects of forward guidance are negligible. A commitment to keep future nominal interest rates low for a few quarters—although macro indicators suggest otherwise—has only trivial effects on current output and employment. The paper explains theoretically why in complete markets models forward guidance is powerful—generating a “forward guidance puzzle†—and why this puzzle disappears in our model. It also clarifies theoretically ambiguous conclusions from previous research about the effectiveness of forward guidance in incomplete and complete markets models.

Keywords: eSS; interest rate; monetary tool; liquidity trap; market model; guidance; macro indicators; trivial effects; forward guidance; puzzle. (search for similar items in EconPapers)
Date: 2018-04
Note: Institutional Papers
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Related works:
Journal Article: Forward guidance (2019)
Working Paper: Forward Guidance (2018)
Working Paper: Forward Guidance (2018)
Working Paper: Forward Guidance (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ess:wpaper:id:12742

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