Higher-Order Forward Guidance

Marc Dordal i Carreras and Seung Joo Lee

No 12034, CESifo Working Paper Series from CESifo

Abstract: This paper introduces a business cycle model that integrates financial markets and endogenous financial volatility at the Zero Lower Bound (ZLB). We derive three key insights: first, central banks can mitigate excess financial volatility at the ZLB by credibly committing to future economic stabilization; second, a commitment to refraining from future stabilization can steer the economy toward more favorable equilibrium paths, thereby revealing a trade-off between future stabilization and reduced financial volatility at the ZLB; third, maintaining uncertainty regarding the timing of future stabilization is strictly superior to alternative forward guidance commitments.

Keywords: monetary policy; forward guidance; financial volatility; risk premium (search for similar items in EconPapers)
JEL-codes: E32 E43 E44 E52 E62 (search for similar items in EconPapers)
Date: 2025
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_12034

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