Forward Guidance

Marcus Hagedorn, Jinfeng Luo, Iourii Manovskii and Kurt Mitman

No 24521, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We assess the power of forward guidance—promises about future interest rates—as a monetary tool in a liquidity trap using a quantitative incomplete-markets model. Our 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. We explain theoretically why in complete markets models forward guidance is powerful—generating a “forward guidance puzzle”—and why this puzzle disappears in our model. We also clarify theoretically ambiguous conclusions from previous research about the effectiveness of forward guidance in incomplete and complete markets models.

JEL-codes: E21 E30 E52 E58 E62 (search for similar items in EconPapers)
Date: 2018-04
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
Note: EFG ME
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Published as Marcus Hagedorn & Jinfeng Luo & Iourii Manovskii & Kurt Mitman, 2019. "Forward Guidance," Journal of Monetary Economics, .

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Journal Article: Forward guidance (2019)
Working Paper: Forward Guidance (2018)
Working Paper: Forward Guidance (2018)
Working Paper: Forward Guidance (2018)
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