Forward Guidance Contracts

Yulin Liu, Hans Gersbach and Volker Hahn

VfS Annual Conference 2016 (Augsburg): Demographic Change from Verein für Socialpolitik / German Economic Association

Abstract: We examine "Forward Guidance Contracts", which make central bankers' utility contingent on the precision of interest-rate forecasts. We integrate those contracts into the New Keynesian Framework and study how they can be used to overcome a liquidity trap. We establish the properties of simple renewable Forward Guidance Contracts and characterize the contracts that the government wants to offer repeatedly. These contracts create favorable tradeoffs between the efficacy of forward guidance at the zero bound and the reduced flexibility in reacting to future events, and dominate long-term contracts for moderate negative natural real interest-rate shocks. We discuss which type of Forward Guidance Contracts can be used when there is uncertainty about natural real interest-rate shocks, a situation which typically calls for moderate incentive intensity. Finally we explore alternative contractual environments.

JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
Date: 2016
New Economics Papers: this item is included in nep-mac
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Related works:
Journal Article: FORWARD GUIDANCE CONTRACTS (2019)
Working Paper: Forward Guidance Contracts (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc16:145552

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