Forward Guidance Contracts

Hans Gersbach, Volker Hahn and Yulin Liu

No 5375, CESifo Working Paper Series from CESifo

Abstract: We examine “Forward Guidance Contracts”, which make central bankers’ utility contingent on the precision of interest-rate forecasts for some time. Such Forward Guidance Contracts are a flexible commitment device and can improve economic performance when the economy is stuck in a liquidity trap. Utilizing the New Keynesian Framework, we establish the properties of simple renewable Forward Guidance Contracts and characterize the contracts that the government wants to offer repeatedly. These contracts create favorable tradeoffs between the efficacy of forward guidance at the zero bound and the reduced flexibility in reacting to future events, when the zero bound on nominal interest rates constrains the central banks’ choice. We discuss how Forward Guidance Contracts can be used when there is uncertainty about natural real interest-rate shocks, a situation which typically calls for moderate incentive intensity. Finally we explore alternative contractual environments.

Keywords: forward guidance; zero lower bound; central banks; incentive contracts; transparency (search for similar items in EconPapers)
JEL-codes: E31 E49 E52 E58 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Journal Article: FORWARD GUIDANCE CONTRACTS (2019)
Working Paper: Forward Guidance Contracts (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:ces:ceswps:_5375

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