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The Delphic forward guidance puzzle in New Keynesian models

Author

Listed:
  • Ippei Fujiwara

    (Keio University)

  • Yuichiro Waki

    (University of Queensland)

Abstract

When the central bank has information that can help the private sector better predict the future, should it communicate such information to the public? In purely forward-looking New Keynesian models, such Delphic forward guidance unambiguously reduces ex ante welfare by increasing the variability of inflation and the output gap. We call this phenomenon the Delphic forward guidance puzzle. In more elaborate models with endogenous state variables, a combination of Delphic forward guidance and preemptive policy actions may improve welfare. However, full information revelation is generally not optimal and what information needs to be revealed is highly model-dependent. (Copyright: Elsevier)

Suggested Citation

  • Ippei Fujiwara & Yuichiro Waki, 2022. "The Delphic forward guidance puzzle in New Keynesian models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 46, pages 280-301, October.
    • Handle: RePEc:red:issued:19-50
    DOI: 10.1016/j.red.2021.10.002
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    More about this item

    Keywords

    News shock; Optimal monetary policy; Private information; Bayesian persuasion; Forward guidance; New Keynesian models;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General

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