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Forward Guidance for Monetary Policy: Is It Desirable?

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Abstract

In this paper we assess whether forward guidance for monetary policy regarding the future path of interest rates is desirable. We distinguish between two cases where forward guidance for monetary policy may be helpful. First, forward guidance may reveal private information of the central bank. We argue that vague, non-binding statements may be desirable. Second, forward guidance may be used as a commitment device. In this case, policy forecasts may be desirable in a classic inflation-bias framework but not in a New Keynesian framework.

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Bibliographic Info

Paper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 08/84.

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Length: 21 pages
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:eth:wpswif:08-84

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Keywords: central banks; transparency; commitment; Federal Reserve; policy inclinations; signaling;

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  1. Clarida, Richard & Galí, Jordi & Gertler, Mark, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," CEPR Discussion Papers 2139, C.E.P.R. Discussion Papers.
  2. Hans Gersbach & Volker Hahn, 2011. "Monetary Policy Inclinations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(8), pages 1707-1717, December.
  3. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  4. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  5. Joseph Farrell & Matthew Rabin, 1996. "Cheap Talk," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 103-118, Summer.
  6. Glenn D. Rudebusch & John C. Williams, 2008. "Revealing the Secrets of the Temple: The Value of Publishing Central Bank Interest Rate Projections," NBER Chapters, in: Asset Prices and Monetary Policy, pages 247-289 National Bureau of Economic Research, Inc.
  7. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(3), pages 733-772, 05.
  8. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
  9. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  10. Frederic S. Mishkin, 2004. "Can Central Bank Transparency Go Too Far?," NBER Working Papers 10829, National Bureau of Economic Research, Inc.
  11. Orphanides, Athanasios & Wieland, Volker, 2000. "Efficient Monetary Policy Design near Price Stability," Journal of the Japanese and International Economies, Elsevier, vol. 14(4), pages 327-365, December.
  12. Gersbach, Hans & Hahn, Volker, 2006. "Signaling And Commitment: Monetary Versus Inflation Targeting," Macroeconomic Dynamics, Cambridge University Press, vol. 10(05), pages 595-624, November.
  13. Hans Gersbach, 2003. "On the negative social value of central banks' knowledge transparency," Economics of Governance, Springer, vol. 4(2), pages 91-102, 08.
  14. William Poole, 2003. "Fed transparency: how, not whether," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 1-8.
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Cited by:
  1. Maria Lucia Florez-Jimenez & Julian A. Parra-Polania, 2014. "Forward guidance with an escape clause: When half a promise is better than a full one," Borradores de Economia 811, Banco de la Republica de Colombia.
  2. Edward J. Balistreri & Russell H. Hillberry & Thomas F. Rutherford, 2008. "Structural Estimation and Solution of International Trade Models with Heterogeneous Firms," CER-ETH Economics working paper series 08/89, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  3. Daniel Laskar, 2010. "Imprecision of Central Bank Announcements and Credibility," PSE Working Papers halshs-00562595, HAL.
  4. Clemens J.M. Kool & Daniel L. Thornton, 2012. "How effective is central bank forward guidance?," Working Papers 2012-063, Federal Reserve Bank of St. Louis.
  5. Balistreri, Edward J. & Hillberry, Russell H. & Rutherford, Thomas F., 2010. "Trade and welfare: Does industrial organization matter?," Economics Letters, Elsevier, vol. 109(2), pages 85-87, November.
  6. repec:use:tkiwps:1205 is not listed on IDEAS
  7. repec:hal:wpaper:halshs-00562595 is not listed on IDEAS

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