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 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.

ARE MAJOR CENTRAL BANKS BLINDED BY THE ANALYTICAL ELEGANCE OF THEIR MODELS? POSSIBLE COSTS OF UNCONVENTIONAL MONETARY POLICY MEASURES

2017 ◽  
Vol 62 (01) ◽  
pp. 87-108 ◽  
Author(s):  
PIOTR CIŻKOWICZ ◽  
ANDRZEJ RZOŃCAZ
Keyword(s):  
Monetary Policy ◽  
Global Financial Crisis ◽  
Significant Risk ◽  
Central Banks ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Unconventional Monetary Policy ◽  
Keynesian Model ◽  
Policy Measures ◽  
The Global Financial Crisis

We survey the possible costs of the unconventional monetary policy measures undertaken by major central banks after the outbreak of the global financial crisis in 2008. We argue that these costs are not easily discernable in the new Keynesian (NK) model, which defines a theoretical framework for monetary policy. First, the costs may result from the effects of unconventional monetary policy measures on the intensity of restructuring and the persistence of uncertainty (which increased after the outbreak of the crisis). However, neither of these processes is considered in the new Keynesian model. Second, costs may be generated not only by distortions in the choices made by economic agents but may also be a result of the decisions made by governments, particularly in terms of the fiscal deficit level. However, the new Keynesian model does not consider the effects of unconventional monetary policy measures on the quality of fiscal policy. Without carefully considering the costs, there is a significant risk that unconventional monetary policy measures could become a conventional response to recurrent crises.

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 Should Inequality Factor into Central Banks' Decisions?

2020 ◽  
Vol 20 (196) ◽  
Author(s):  
Niels-Jakob Hansen ◽  
Alessandro Lin ◽  
Rui Mano
Keyword(s):  
Monetary Policy ◽  
Potential Role ◽  
Central Banks ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Taylor Rules ◽  
Keynesian Model

Inequality is increasingly a concern. Fiscal and structural policies are well-understood mitigators. However, less is known about the potential role of monetary policy. This paper investigates how inequality matters for monetary policy within a tractable Two-Agent New Keynesian model that captures important dimensions of inequality. We find some support for making inequality an explicit target for monetary policy, particularly if central banks follow standard Taylor rules.

scholarly journals Understanding the Great Recession

2015 ◽  
Vol 7 (1) ◽  
pp. 110-167 ◽  
Author(s):  
Lawrence J. Christiano ◽  
Martin S. Eichenbaum ◽  
Mathias Trabandt
Keyword(s):  
Great Recession ◽  
Economic Activity ◽  
New Keynesian ◽  
Factor Productivity ◽  
Working Capital ◽  
The Great Recession ◽  
Keynesian Model ◽  
Price Rigidities ◽  
The Cost ◽  
Joint Behavior

We argue that the vast bulk of movements in aggregate real economic activity during the Great Recession were due to financial frictions. We reach this conclusion by looking through the lens of an estimated New Keynesian model in which firms face moderate degrees of price rigidities, no nominal rigidities in wages, and a binding zero lower bound constraint on the nominal interest rate. Our model does a good job of accounting for the joint behavior of labor and goods markets, as well as inflation, during the Great Recession. According to the model the observed fall in total factor productivity and the rise in the cost of working capital played critical roles in accounting for the small drop in inflation that occurred during the Great Recession. (JEL E12, E23, E24, E31, E32, E52)

scholarly journals Optimal Forward Guidance

2019 ◽  
Vol 11 (4) ◽  
pp. 310-345 ◽  
Author(s):  
Florin O. Bilbiie
Keyword(s):  
Interest Rates ◽  
Dynamic Stochastic General Equilibrium ◽  
Bad News ◽  
New Keynesian ◽  
Simple Rule ◽  
New Keynesian Model ◽  
Liquidity Trap ◽  
Forward Guidance ◽  
Keynesian Model ◽  
Dynamic Stochastic

Optimal forward guidance is the simple policy of keeping interest rates low for some optimally determined number of periods after the liquidity trap ends and moving to normal-times optimal policy thereafter. I solve for the optimal duration in closed form in a new Keynesian model and show that it is close to fully optimal Ramsey policy. The simple rule “announce a duration of half of the trap’s duration times the disruption” is a good approximation, including in a medium-scale dynamic stochastic general equilibrium (DSGE) model. By anchoring expectations of Delphic agents (who mistake commitment for bad news), the simple rule is also often welfare-preferable to Odyssean commitment. (JEL D84, E12, E43, E52, E56)

Coexistence of equilibria in a New Keynesian model with heterogeneous beliefs

2015 ◽  
Vol 79 ◽  
pp. 83-95 ◽  
Author(s):  
Anna Agliari ◽  
Nicolò Pecora ◽  
Alessandro Spelta
Keyword(s):  
Heterogeneous Beliefs ◽  
New Keynesian ◽  
New Keynesian Model ◽  
Keynesian Model
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