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State-Contingent Forward Guidance

Valentin Jouvanceau, Julien Albertini and Stéphane Moyen

No 100, Bank of Lithuania Working Paper Series from Bank of Lithuania

Abstract: This paper proposes a new strategy for modeling and solving state-dependent forward guidance policies (SCFG). We study its transmission channels using a DSGE model with search and matching frictions in which agents account for the fact that the SCFG is an endogenous regime-switching system. A fully credible SCFG causes a boom in inflation and output but no rapid exit from the ZLB. Thus, the transmission of its effects is primarily through the realization of additional ZLB periods more than through changes in expectations. We next consider the implications of imperfect credibility. In this case of uncertainty, an SCFG is less impactful. Finally, using counterfactual experiments on the December 2012 FOMC statement, we find that it led to about 1.5 pp gain in unemployment and 0.5 pp in inflation.

Keywords: New Keynesian model; Search and matching; ZLB; Forward guidance. (search for similar items in EconPapers)
JEL-codes: E30 J60 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2022-01-25
New Economics Papers: this item is included in nep-ban, nep-cba, nep-dge, nep-lab, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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