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Forward Guidance

Marcus Hagedorn, Jinfeng Luo, Iourii Manovskii () and Kurt Mitman

No 12858, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: We assess the power of forward guidance - promises about future interest rates - as a monetary tool in a liquidity trap using a quantitative incomplete-markets model. Our results suggest the effects of forward guidance are negligible. A commitment to keep future nominal interest rates low for a few quarters-although macro indicators suggest otherwise-has only trivial effects on current output and employment. We explain theoretically why in complete markets models forward guidance is powerful-generating a "forward guidance puzzle"-and why this puzzle disappears in our model. We also clarify theoretically ambiguous conclusions from previous research about the effectiveness of forward guidance in incomplete and complete markets models.

Keywords: forward guidance; incomplete markets; monetary policy (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
Date: 2018-04
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