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Attenuating the forward guidance puzzle: Implications for optimal monetary policy

Taisuke Nakata, Ryota Ogaki, Sebastian Schmidt () and Paul Yoo

Journal of Economic Dynamics and Control, 2019, vol. 105, issue C, 90-106

Abstract: We examine the implications of less powerful forward guidance for optimal policy using a sticky-price model with an effective lower bound (ELB) on nominal interest rates as well as a discounted Euler equation and a discounted Phillips curve. When the private-sector agents discount future economic conditions more in making their decisions today, a future rate cut becomes less effective in stimulating current economic activity. Under a wide range of plausible degrees of discounting, it is optimal for the central bank to compensate for the reduced effect of a future rate cut by keeping the policy rate at the ELB for longer.

Keywords: Forward guidance; Optimal policy; Discounted Euler equation; Discounted Phillips curve; Effective lower bound (search for similar items in EconPapers)
JEL-codes: E52 E58 E61 (search for similar items in EconPapers)
Date: 2019
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