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The influence of learning and price-level targeting on central bank forward guidance

Stephen Cole ()

Journal of Macroeconomics, 2020, vol. 65, issue C

Abstract: This paper examines how the effectiveness of central bank forward guidance depends on two key channels: the expectations formation process and the monetary policy regime. The results show that rational expectations relative to an adaptive learning rule amplifies the positive benefits a price-level targeting central bank creates for forward guidance. Specifically, forward guidance generates greater amounts of output and inflation under a price-level than inflation targeting monetary policy regime, but rational expectations overstates these positive benefits compared to adaptive learning. The different responses of expectations between rational expectations and adaptive learning to forward guidance are driving this performance gap. Thus, policymakers should consider how expectations are modeled if forward guidance and price-level targeting are implemented in an economy.

Keywords: Forward guidance; Inflation targeting; Price-level targeting; Adaptive learning; Expectations; Monetary policy (search for similar items in EconPapers)
JEL-codes: D84 E30 E31 E50 E52 E58 E60 (search for similar items in EconPapers)
Date: 2020
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DOI: 10.1016/j.jmacro.2020.103213

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