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Uncertain forward guidance

Alex Haberis (), Richard Harrison () and Matt Waldron ()

No 654, Bank of England working papers from Bank of England

Abstract: We explore the effects of forward guidance at the zero lower bound when there is uncertainty over the lift-off date arising from: (i) the imperfect credibility of time- inconsistent forward-guidance promises; (ii) incomplete communication. We use a simple New Keynesian model to demonstrate that a forward guidance announcement to delay lift-off may be no more powerful in a more interest rate sensitive economy. We also demonstrate that attempts to delay lift-off further may fail to generate additional stimulus if the temptation to renege on the announcement is sufficiently great. In an empirical application, we consider counterfactual policy experiments based on the Federal Open Market Committee’s ‘threshold-based’ forward guidance, in which we link the probability of lift-off to the amount by which the announced unemployment threshold is breached. We show that a more precise articulation of the lift-off conditions requires a lower unemployment threshold in order to deliver the same amount of stimulus as a less precise one.

Keywords: Forward guidance; uncertainty; zero lower bound (search for similar items in EconPapers)
JEL-codes: E12 E17 E20 E30 E42 E52 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2017-03-31
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