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Beliefs formation and the puzzle of forward guidance power

Beqiraj Elton, Giovanni Di Bartolomeo () and Marco Di Pietro ()

wp.comunite from Department of Communication, University of Teramo

Abstract: We study the extent to which the belief-formation process affects the dynamics of macroeconomic variables when the central bank uses forward guidance. Standard sticky-price models imply that far future forward guidance has huge and implausible effects on current outcomes, these effects grow in its horizon (forward guidance power puzzle). By a parsimonious macro-model that allows for the role of bounded rationality and heterogeneous agents, we obtain tempered responses for real and nominal variables.

New Economics Papers: this item is included in nep-mon
Date: 2017-11
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