Forward Guidance Under the Cost Channel

David Finck ()
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David Finck: University of Giesssen

MAGKS Papers on Economics from Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung)

Abstract: A common finding in the literature is that forward guidance cannot be credible under discretionary policy as long as the zero lower bound is an one-off event. However, this is not the case when recurring episodes of zero interest rates are possible. In this paper, we contribute to this new result and assess the sustainability of forward guidance under the cost channel. We find that forward guidance can be sustainable under the cost channel. However, we show that it is less credible compared to a standard New Keynesian model. Our results show that this finding also depends on the strength of the cost channel. Furthermore, provide evidence that ignoring the presence of a cost channel can be costly in terms of steady-state consumption.

Keywords: Forward Guidance; Sustainability; Cost Channel; Discretion (search for similar items in EconPapers)
JEL-codes: E12 E43 E52 E58 E61 (search for similar items in EconPapers)
Pages: 40 pages
Date: 2020
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Persistent link: https://EconPapers.repec.org/RePEc:mar:magkse:202004

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