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Uncertain policy promises

Alex Haberis (), Richard Harrison () and Matt Waldron

European Economic Review, 2019, vol. 111, issue C, 459-474

Abstract: We develop a general method for analyzing the effects of macroeconomic policy promises about which the private sector is uncertain. We illustrate the method in two applications to a central bank’s ‘forward guidance’ about the path for its policy rate. We demonstrate that uncertainty about forward guidance resulting from its potential to be imperfectly credible makes it much less powerful than in textbook models. In an application to the FOMC’s ‘threshold-based’ guidance, we show that increasing the precision of the conditions under which the policy rate ‘lifts off’ from the zero bound requires a lower unemployment threshold to deliver a given amount of stimulus.

Keywords: Imperfect credibility; Forward guidance; Discretion; Uncertainty; Zero lower bound (search for similar items in EconPapers)
JEL-codes: E12 E17 E20 E30 E42 E52 E61 (search for similar items in EconPapers)
Date: 2019
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