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Does my model predict a forward guidance puzzle?

Christopher G. Gibbs and Nigel McClung

No 19/2019, Research Discussion Papers from Bank of Finland

Abstract: We provide suffcient conditions for when a rational expectations structural model predicts bounded responses of endogenous variables to forward guidance announcements. The conditions coincide with a special case of the well-known (E)xpectation-stability conditions that govern when agents can learn a Rational Expectations Equilibrium. Importantly, we show that the conditions are distinct from the determinacy conditions. We show how the conditions are useful for diagnosing the features of a model that contribute to the Forward Guidance Puzzle and reveal how to construct well-behaved forward guidance predictions in standard medium-scale DSGE models.

JEL-codes: E31 E32 E52 D84 D83 (search for similar items in EconPapers)
Date: 2019-09-10
New Economics Papers: this item is included in nep-dge, nep-mac, nep-mon and nep-upt
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Persistent link: https://EconPapers.repec.org/RePEc:bof:bofrdp:2019_019

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