Beliefs formation and the puzzle of forward guidance power
Giovanni Di Bartolomeo () and
Marco Di Pietro ()
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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.
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Working Paper: Beliefs formation and the puzzle of forward guidance power (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:ter:wpaper:00131
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