Does my model predict a forward guidance puzzle?
Christopher G. Gibbs and
No 19/2019, Research Discussion Papers from Bank of Finland
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)
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Persistent link: https://EconPapers.repec.org/RePEc:bof:bofrdp:2019_019
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