Versatile forward guidance: escaping or switching?

Hans Gersbach, Yulin Liu and Martin Tischhauser

Journal of Economic Dynamics and Control, 2021, vol. 127, issue C

Abstract: We examine forward guidance when an economy faces negative natural real interest rates and subsequent supply shocks. We introduce two versatile designs: escaping and switching. In the former, the central bank escapes low interest-rate commitment when inflation reaches a self-chosen threshold. In the latter, the central bank can switch from interest-rate forecasts to inflation forecasts any time. Central bankers are scrupulous and face intrinsic (or extrinsic) costs when they deviate from their policy announcements in the future. We show that switching forward guidance is preferable over escaping forward guidance if and only if negative real interest rate shocks are moderate. Furthermore, with the polynomial chaos expansion method and Sobol’ Indices, we identify the decisive parameters and show that our findings are globally robust to parameter uncertainty.

Keywords: Forward guidance; Zero lower bound; Central banks; Transparency; Global robustness; Sobol’ Indices; Polynomial chaos expansion (search for similar items in EconPapers)
JEL-codes: E31 E49 E52 E58 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Versatile Forward Guidance: Escaping or Switching? (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:127:y:2021:i:c:s0165188921000221

DOI: 10.1016/j.jedc.2021.104087

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