The promises (and perils) of control-contingent forward guidance

He Nie and Jordan Roulleau-Pasdeloup
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He Nie: National University of Singapore

Review of Economic Dynamics, 2023, vol. 49, 77-98

Abstract: We develop a model with control-contingent forward guidance: the central bank explicitly anchors future policy announcements to short run inflation. Even though the model features past promises, we compute a closed form solution using a simple Markov chain representation. This allows us to show analytically that control-contingent forward guidance can rid the model of sunspot liquidity traps. The same holds for a policy of price level targeting, which emerges as a special case. Finally, we leverage this new framework to formally show that announced interest rates are only a means to an end: what truly matters is expected inflation. (Copyright: Elsevier)

Keywords: Zero lower bound; Forward guidance; Sunspot equilibria; Monetary policy (search for similar items in EconPapers)
JEL-codes: E52 E58 E61 (search for similar items in EconPapers)
Date: 2023
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Working Paper: Online Appendix to "The promises (and perils) of control-contingent forward guidance" (2022)
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DOI: 10.1016/j.red.2022.07.002

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