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The Power of Forward Guidance Revisited

Alisdair McKay (), Emi Nakamura and Jon Steinsson ()

American Economic Review, 2016, vol. 106, issue 10, 3133-58

Abstract: In recent years, central banks have increasingly turned to forward guidance as a central tool of monetary policy. Standard monetary models imply that far future forward guidance has huge effects on current outcomes, and these effects grow with the horizon of the forward guidance. We present a model in which the power of forward guidance is highly sensitive to the assumption of complete markets. When agents face uninsurable income risk and borrowing constraints, a precautionary savings effect tempers their responses to changes in future interest rates. As a consequence, forward guidance has substantially less power to stimulate the economy.

JEL-codes: E21 E40 E50 (search for similar items in EconPapers)
Date: 2016
Note: DOI: 10.1257/aer.20150063
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Working Paper: The Power of Forward Guidance Revisited (2015) Downloads
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