The Delphic forward guidance puzzle in New Keynesian models

Ippei Fujiwara and Yuichiro Waki

Review of Economic Dynamics, 2022, vol. 46, 280-301

Abstract: When the central bank has information that can help the private sector better predict the future, should it communicate such information to the public? In purely forward-looking New Keynesian models, such Delphic forward guidance unambiguously reduces ex ante welfare by increasing the variability of inflation and the output gap. We call this phenomenon the Delphic forward guidance puzzle. In more elaborate models with endogenous state variables, a combination of Delphic forward guidance and preemptive policy actions may improve welfare. However, full information revelation is generally not optimal and what information needs to be revealed is highly model-dependent. (Copyright: Elsevier)

Keywords: News shock; Optimal monetary policy; Private information; Bayesian persuasion; Forward guidance; New Keynesian models (search for similar items in EconPapers)
JEL-codes: E30 E40 E50 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (1)

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DOI: 10.1016/j.red.2021.10.002

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