Forward Guidance without Common Knowledge

George-Marios Angeletos and Chen Lian

No 22785, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: How does the economy respond to news about future policies or future fundamentals? Standard practice assumes that agents have common knowledge of such news and face no uncertainty about how others will respond. Relaxing this assumption attenuates the general-equilibrium effects of news and rationalizes a form of myopia at the aggregate level. We establish these insights within a class of games which nests, but is not limited to, the New Keynesian model. Our results help resolve the forward-guidance puzzle, offer a rationale for the front-loading of fiscal stimuli, and illustrate more broadly the fragility of predictions that rest on long series of forward-looking feedback loops.

JEL-codes: C72 D82 E03 E32 E43 E52 E58 (search for similar items in EconPapers)
Date: 2016-10
New Economics Papers: this item is included in nep-knm, nep-mac and nep-mon
Note: EFG ME
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Citations: View citations in EconPapers (20)

Published as George-Marios Angeletos & Chen Lian, 2018. "Forward Guidance without Common Knowledge," American Economic Review, vol 108(9), pages 2477-2512.

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Journal Article: Forward Guidance without Common Knowledge (2018)
Working Paper: Forward Guidance without Common Knowledge (2017)
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