Attenuating the Forward Guidance Puzzle: Implications for Optimal Monetary Policy
Sebastian Schmidt (),
Taisuke Nakata and
No 2018-049, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)
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.
Keywords: Optimal policy; Discounted euler equation; Discounted phillips curve; Forward guidance; Effective lower bound (search for similar items in EconPapers)
JEL-codes: E52 E58 E61 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2018-07-19, Revised 2018-07-19
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Journal Article: Attenuating the forward guidance puzzle: Implications for optimal monetary policy (2019)
Working Paper: Attenuating the forward guidance puzzle: implications for optimal monetary policy (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2018-49
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