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Forward guidance

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Listed:
  • Hagedorn, Marcus
  • Luo, Jinfeng
  • Manovskii, Iourii
  • Mitman, Kurt

Abstract

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.

Suggested Citation

  • Hagedorn, Marcus & Luo, Jinfeng & Manovskii, Iourii & Mitman, Kurt, 2019. "Forward guidance," Journal of Monetary Economics, Elsevier, vol. 102(C), pages 1-23.
    • Handle: RePEc:eee:moneco:v:102:y:2019:i:c:p:1-23
    DOI: 10.1016/j.jmoneco.2019.01.014
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    as
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    2. Hagedorn, Marcus, 2016. "A Demand Theory of the Price Level," CEPR Discussion Papers 11364, C.E.P.R. Discussion Papers.
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    6. Kurt Mitman & Iourii Manovskii & Marcus Hagedorn, 2017. "The Fiscal Multiplier," 2017 Meeting Papers 1383, Society for Economic Dynamics.
    7. Greg Kaplan & Benjamin Moll & Giovanni L. Violante, 2018. "Monetary Policy According to HANK," American Economic Review, American Economic Association, vol. 108(3), pages 697-743, March.
    8. Krueger, D. & Mitman, K. & Perri, F., 2016. "Macroeconomics and Household Heterogeneity," Handbook of Macroeconomics, in: J. B. Taylor & Harald Uhlig (ed.), Handbook of Macroeconomics, edition 1, volume 2, chapter 0, pages 843-921, Elsevier.
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    Full references (including those not matched with items on IDEAS)

    Citations

    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Forward Guidance
      by Christian Zimmermann in NEP-DGE blog on 2018-10-10 14:49:59

    RePEc Biblio mentions

    As found on the RePEc Biblio, the curated bibliography for Economics:
    1. > Macroeconomics > Monetary Theory

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    as


    Cited by:

    1. Campbell, Jeffrey R. & Ferroni, Filippo & Fisher, Jonas D.M. & Melosi, Leonardo, 2019. "The limits of forward guidance," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 118-134.

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    More about this item

    Keywords

    Forward guidance; Incomplete markets; Liquidity trap;
    All these keywords.

    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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