STABILIZATION AND COMMITMENT: FORWARD GUIDANCE IN ECONOMIES WITH RATIONAL EXPECTATIONS
Andrew Hughes Hallett () and
Macroeconomic Dynamics, 2018, vol. 22, issue 1, 122-134
We construct a theory of forward guidance in economic policy making in order to provide a framework for explaining the role and strategic advantages of including forward guidance as an explicit part of policy design. We do this by setting up a general policy problem in which forward guidance plays a role, and then examine the consequences for performance when that guidance is withdrawn. We show that forward guidance provides enhanced controllability and stabilizabilityâ€”especially where such properties may not otherwise be available. As a by-product, we find that forward guidance limits the scope and incentives for time-inconsistent behavior in an economy whose policy goals are ultimately reachable. It also adds to the credibility of a set of policies.
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