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Forward Guidance: Communication, Commitment, or Both?

Marco Bassetto

No WP-2019-5, Working Paper Series from Federal Reserve Bank of Chicago

Abstract: A policy of forward guidance has been suggested either as a form of commitment (\"Odyssean\") or as a way of conveying information to the public (\"Delphic\"). I analyze the strategic interaction between households and the central bank as a game in which the central bank can send messages to the public independently of its actions. In the absence of private information, the set of equilibrium payoffs is independent of the announcements of the central bank: forward guidance as a pure commitment mechanism is a redundant policy instrument. When private information is present, central bank communication can instead have social value. Forward guidance emerges as a natural communication strategy when the private information in the hands of the central bank concerns its own preferences or beliefs: while forward guidance per se is not a substitute for the central bank's commitment or credibility, it is an instrument that allows policymakers to leverage their credibility to convey valuable information about their future policy plans. It is in this context that \"Odyssean forward guidance\" can be understood.

Keywords: Forward guidance; monetary policy; interest rates (search for similar items in EconPapers)
JEL-codes: C5 E4 E5 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2019-07-25
New Economics Papers: this item is included in nep-cba, nep-gth, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Journal Article: Forward guidance: Communication, commitment, or both? (2019) Downloads
Working Paper: Forward guidance: communication, commitment, or both? (2019) Downloads
Working Paper: Forward Guidance: Communication, Commitment, or Both? (2015) Downloads
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DOI: 10.21033/wp-2019-05

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