Optimal Forward Guidance

Florin Bilbiie

American Economic Journal: Macroeconomics, 2019, vol. 11, issue 4, 310-45

Abstract: Optimal forward guidance is the simple policy of keeping interest rates low for some optimally determined number of periods after the liquidity trap ends and moving to normal-times optimal policy thereafter. I solve for the optimal duration in closed form in a new Keynesian model and show that it is close to fully optimal Ramsey policy. The simple rule "announce a duration of half of the trap's duration times the disruption" is a good approximation, including in a medium-scale dynamic stochastic general equilibrium (DSGE) model. By anchoring expectations of Delphic agents (who mistake commitment for bad news), the simple rule is also often welfare-preferable to Odyssean commitment.

JEL-codes: D84 E12 E43 E52 E58 (search for similar items in EconPapers)
Date: 2019
Note: DOI: 10.1257/mac.20170335
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Citations: View citations in EconPapers (19)

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Working Paper: Optimal Forward Guidance (2016)
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