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Beliefs formation and the puzzle of forward guidance power

Elton Beqiraj, Giovanni Di Bartolomeo () and Marco Di Pietro

Journal of Macroeconomics, 2019, vol. 60, issue C, 20-32

Abstract: We study the extent to which the belief-formation process affects the dynamics of macroeconomic variables when the central bank uses forward guidance. Recent literature has emphasized two kinds of puzzle associated to forward guidance. First, standard sticky-price models imply that far future forward guidance has huge and implausible effects on current outcomes, these effects grow in its horizon. Second, these models tend to overestimate the effects of central bank’s commitment to keep interest rate below the natural rate for a given period of time. Focusing on the former puzzle, by a parsimonious macro-model that allows for the role of bounded rationality and heterogeneous agents, we obtain tempered responses for both real and nominal variables.

Keywords: Forward guidance power; Heterogeneous agents; Bounded rationality; Monetary policy; Announcements (search for similar items in EconPapers)
JEL-codes: E40 E50 E21 (search for similar items in EconPapers)
Date: 2019
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Working Paper: Beliefs formation and the puzzle of forward guidance power (2017) Downloads
Working Paper: Beliefs formation and the puzzle of forward guidance power (2017) Downloads
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