The Puzzle, the Power, and the Dark Side: Forward Guidance Redux
No 12231, CEPR Discussion Papers from C.E.P.R. Discussion Papers
Forward guidance (FG) is phenomenally powerful in New Keynesian models---a feature that earned the label "FG puzzle". This paper shows formally how two channels are jointly necessary to reduce the power enough to resolve the puzzle: hand-to-mouth constrained households' income respond to aggregate less than one-to-one; and unconstrained households self-insure idiosyncratic risk. These channels are complementary: if the former condition fails, FG power is instead amplified and the puzzle aggravated. Yet optimal policy does not imply larger FG duration even with such puzzling amplification, because FG power has a dark side: when it increases, so does its welfare cost.
Keywords: forward guidance; hand-to-mouth; heterogenous households; aggregate demand; self-insurance; optimal monetary policy; liquidity trap; Keynesian cross. (search for similar items in EconPapers)
JEL-codes: E21 E31 E40 E44 E50 E52 E58 E60 E62 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
CEPR Discussion Papers are free to download for our researchers, subscribers and members. If you fall into one of these categories but have trouble downloading our papers, please contact us at firstname.lastname@example.org
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:cpr:ceprdp:12231
Ordering information: This working paper can be ordered from
http://www.cepr.org/ ... rs/dp.php?dpno=12231
Access Statistics for this paper
More papers in CEPR Discussion Papers from C.E.P.R. Discussion Papers Centre for Economic Policy Research, 33 Great Sutton Street, London EC1V 0DX.
Bibliographic data for series maintained by ().