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Forward guidance
Stockholm University, Faculty of Social Sciences, Institute for International Economic Studies. Centre for Economic Policy Research, UK.
Number of Authors: 42019 (English)In: Journal of Monetary Economics, ISSN 0304-3932, E-ISSN 1873-1295, Vol. 102, p. 1-23Article in journal (Refereed) Published
Abstract [en]

We assess the power of forward guidance promises about future interest rates as a monetary tool in a liquidity trap using a quantitative incomplete-markets model. Our results suggest the effects of forward guidance are negligible. A commitment to keep future nominal interest rates low for a few quarters although macro indicators suggest otherwise has only trivial effects on current output and employment. We explain theoretically why in complete markets models forward guidance is powerful generating a forward guidance puzzle and why this puzzle disappears in our model. We also clarify theoretically ambiguous conclusions from previous research  about the effectiveness of forward guidance in incomplete and complete markets models.

Place, publisher, year, edition, pages
2019. Vol. 102, p. 1-23
Keywords [en]
Forward guidance, Incomplete markets, Liquidity trap
National Category
Economics and Business
Identifiers
URN: urn:nbn:se:su:diva-169066DOI: 10.1016/j.jmoneco.2019.01.014ISI: 000466623400001OAI: oai:DiVA.org:su-169066DiVA, id: diva2:1318250
Conference
Carnegie-Rochester-NYU (CRN) Conference on Public Policy honoring the contributions of Charles Plosser to Economics, University of Rochester, Simon Business School, UK, April 20-21, 2018
Available from: 2019-05-27 Created: 2019-05-27 Last updated: 2019-05-27Bibliographically approved

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