Attenuating the forward guidance puzzle: implications for optimal monetary policy
Sebastian Schmidt () and
No 2220, Working Paper Series from European Central Bank
We examine the implications of less powerful forward guidance for optimal policy using a sticky-price model with an effective lower bound (ELB) on nominal interest rates as well as a discounted Euler equation and Phillips curve. When the private-sector agents discount future economic conditions more in making their decisions today, an announced cut in future interest rates becomes less effective in stimulating current economic activity. While the implication of such discounting for optimal policy depends on its degree, we ﬁnd that, under a wide range of plausible degrees of discounting, it is optimal for the central bank to compensate for the reduced effect of a future rate cut by keeping the policy rate at the ELB for longer. JEL Classification: E52, E58, E61
Keywords: discounted euler equation; discounted phillips curve; eﬀective lower bound; forward guidance; optimal policy (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Working Paper: Attenuating the Forward Guidance Puzzle: Implications for Optimal Monetary Policy (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ecb:ecbwps:20192220
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