scholarly journals The effect of central bank credibility on forward guidance in an estimated New Keynesian model

2021 ◽  
pp. 1-39
Author(s):  
Stephen J. Cole ◽  
Enrique Martínez-García
Keyword(s):  
Central Bank ◽  
Rational Expectations ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Survey Of Professional Forecasters ◽  
Forward Guidance ◽  
Keynesian Model ◽  
The Us ◽  
Imperfect Credibility ◽  
Central Bank Credibility

Abstract This paper examines the effectiveness of forward guidance shocks in the US. We estimate a New Keynesian model with imperfect central bank credibility and heterogeneous expectations using Bayesian methods and survey data from the Survey of Professional Forecasters (SPF). The results provide important takeaways: (1) The estimated credibility of the Fed’s forward guidance announcements is relatively high, but anticipation effects are attenuated. Accordingly, output and inflation do not respond as favorably as in the fully credible counterfactual. (2) The so-called “forward guidance puzzle” arises partly from the unrealistically large responses of macroeconomic variables to forward guidance under perfect credibility and homogeneous fully informed rational expectations, assumptions which are found to be jointly inconsistent with the observed US data. (3) Imperfect credibility provides a plausible explanation for the empirical evidence of forecasting error predictability based on forecasting disagreement found in the SPF data. Thus, we show that accounting for imperfect credibility and forecasting disagreements is important to understand the formation of expectations and the transmission mechanism of forward guidance.

scholarly journals Forward Guidance and Heterogeneous Beliefs

2019 ◽  
Vol 11 (3) ◽  
pp. 1-29 ◽  
Author(s):  
Philippe Andrade ◽  
Gaetano Gaballo ◽  
Eric Mengus ◽  
Benoît Mojon
Keyword(s):  
Economic Activity ◽  
Central Banks ◽  
Heterogeneous Beliefs ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Survey Of Professional Forecasters ◽  
Forward Guidance ◽  
Keynesian Model ◽  
Guidance Policy ◽  
The Cost

Central banks’ announcements that rates are expected to remain low could signal either a weak macroeconomic outlook, which would slow expenditures, or a more accommodative stance, which may stimulate economic activity. We use the Survey of Professional Forecasters to show that, when the Fed gave guidance between 2011:III and 2012:IV, these two interpretations coexisted despite a consensus on low expected rates. We rationalize these facts in a New-Keynesian model where heterogeneous beliefs introduce a trade-off in forward guidance policy: leveraging on the optimism of those who believe in monetary easing comes at the cost of inducing excess pessimism in non-believers. (JEL D83, E12, E43, E52, E58, E65)

scholarly journals Public Debt and Changing Inflation Targets

2016 ◽  
Vol 8 (4) ◽  
pp. 142-176 ◽  
Author(s):  
Michael U. Krause ◽  
Stéphane Moyen
Keyword(s):  
Central Bank ◽  
Public Debt ◽  
Pronounced Effect ◽  
New Keynesian ◽  
Moderate Increase ◽  
New Keynesian Model ◽  
Inflation Target ◽  
Keynesian Model ◽  
Maturity Structure ◽  
Inflation Targets

What are the effects of a higher central bank inflation target on the burden of real public debt? Several recent proposals have suggested that even a moderate increase in the inflation target can have a pronounced effect on real public debt. We consider this question in a New Keynesian model with a maturity structure of public debt and an imperfectly observed inflation target. We find that moderate changes in the inflation target only have significant effects on real public debt if they are essentially permanent. Moreover, the additional benefits of not communicating a change in the inflation target are minor. (JEL E12, E31, E52, H63)

scholarly journals Forward Guidance without Common Knowledge

2018 ◽  
Vol 108 (9) ◽  
pp. 2477-2512 ◽  
Author(s):  
George-Marios Angeletos ◽  
Chen Lian
Keyword(s):  
General Equilibrium ◽  
Common Knowledge ◽  
Feedback Loops ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Aggregate Level ◽  
Standard Practice ◽  
Forward Guidance ◽  
Keynesian Model ◽  
Forward Looking

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 D82, D83, D84, E12, E23, E52, E62)

scholarly journals Walk on the Wild Side: Temporarily Unstable Paths and Multiplicative Sunspots

2019 ◽  
Vol 109 (5) ◽  
pp. 1805-1842 ◽  
Author(s):  
Guido Ascari ◽  
Paolo Bonomolo ◽  
Hedibert F. Lopes
Keyword(s):  
Stochastic Volatility ◽  
Rational Expectations ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Inflation Dynamics ◽  
Generalized Model ◽  
Keynesian Model

We propose a generalization of the rational expectations framework to allow for temporarily unstable paths. Our approach introduces multiplicative sunspot shocks and it yields drifting parameters and stochastic volatility. Then, we provide an econometric strategy to estimate this generalized model on the data. The methodology allows the data to choose between different possible alternatives: determinacy, indeterminacy, and temporary instability. We apply our methodology to US inflation dynamics in the 1970s through the lens of a simple New Keynesian model. When temporarily unstable paths are allowed, the data unambiguously select them to explain the stagflation period in the 1970s. (JEL D84, E12, E31, E32, E52)

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