The Limits of Central Bank forward Guidance under Learning

Stephen Cole

International Journal of Central Banking, 2020, vol. 16, issue 4, 199-250

Abstract: This paper investigates the effectiveness of central bank forward guidance while relaxing two standard macroeconomic assumptions: rational expectations and frictionless financial markets. The results show that the addition of financial frictions amplifies the differences between rational expectations and adaptive learning to forward guidance. During a period of economic crisis, output under rational expectations displays more favorable responses to forward guidance than under adaptive learning. These differences are exacerbated when compared with a similar analysis without financial frictions. Thus, monetary policymakers should consider the way in which expectations and credit frictions are modeled when examining the effects of forward guidance.

JEL-codes: D84 E30 E44 E50 E52 E58 E60 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (8)

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Related works:
Working Paper: The Limits of Central Bank Forward Guidance under Learning (2016)
Working Paper: The limits of central bank forward guidance under learning (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2020:q:3:a:5

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