Forward Guidance and Heterogeneous Beliefs

Philippe Andrade, Gaetano Gaballo, Eric Mengus and Benoit Mojon

No 1192, HEC Research Papers Series from HEC Paris

Abstract: Central banks' announcements that future interest rates will remain low could signal either a weak future macroeconomic outlook - which is bad news - or a future expansionary monetary policy - which is good news. In this paper, we use the Survey of Professional Forecasters to show that these two interpretations coexisted when the Fed engaged into date-based forward guidance policy between 2011Q3 and 2012Q4. We then extend an otherwise standard New-Keynesian model to study the consequences of such heterogeneous interpretations. We show that it can strongly mitigate the effectiveness of forward guidance and that the presence of few pessimists may require keeping rates low for longer. However, when pessimists are sufficiently numerous forward guidance can even be detrimental.

Keywords: monetary policy; forward guidance; communication; heterogeneous beliefs; disagreement (search for similar items in EconPapers)
JEL-codes: A10 (search for similar items in EconPapers)
Pages: 65 pages
Date: 2016-11-01
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2911005 Full text (application/pdf)

Related works:
Journal Article: Forward Guidance and Heterogeneous Beliefs (2019)
Working Paper: Forward guidance and heterogeneous beliefs (2018)
Working Paper: Forward Guidance and Heterogeneous Beliefs (2018)
Working Paper: Forward guidance and heterogenous beliefs (2016)
Working Paper: Forward Guidance and Heterogeneous Beliefs (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:ebg:heccah:1192

DOI: 10.2139/ssrn.2911005

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