Forward guidance investigation in new Keynesian models

Xin Xu and Xiaoguang Xu

Economic Research-Ekonomska Istraživanja, 2023, vol. 36, issue 2, 2145983

Abstract: Forward guidance is widely considered a useful tool for improving monetary policy transmission. This paper introduces endogenous Delphic guidance in which future policy targets are time-varying and dependent on the future economy. The results show that the performance of inflation-targeting forward guidance depends partially on the forward horizon and the agents’ expectation, while announcing an interim output target could stimulate the economy only under a rational expectation environment and requires a short forward horizon. We also discuss the effectiveness of Odyssean forward guidance which incorporates monetary authorities’ preferences. The results indicate that the effect of a commitment on future paths of an interest-rate rule is based on the agents’ expectations.

Date: 2023
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DOI: 10.1080/1331677X.2022.2145983

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