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Fiscal Forward Guidance:A Case for Selective Transparency

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  • Fujiwara, Ippei
  • Waki, Yuichiro

Abstract

Should the fiscal authority use forward guidance to reduce future policy uncertainty perceived by private agents? Using dynamic general equilibrium models, we examine the welfare effects of announcing future fiscal policy shocks and show that selective transparency is desirable — announcing future policy shocks that are distortionary can be detrimental to ex ante social welfare, whereas announcing non-distortionary shocks generally improves welfare. Sizable welfare gains are found with constructive ambiguity regarding the timing of a tax increase in a realistic fiscal consolidation scenario. However, being secretive about distortionary shocks is time inconsistent, and welfare loss from communication may be unavoidable.

Suggested Citation

  • Fujiwara, Ippei & Waki, Yuichiro, 2018. "Fiscal Forward Guidance:A Case for Selective Transparency," CEI Working Paper Series 2017-8, Center for Economic Institutions, Institute of Economic Research, Hitotsubashi University.
    • Handle: RePEc:hit:hitcei:2017-8
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    Citations

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    Cited by:

    1. End, Nicolas, 2023. "Big Brother is also being watched: Measuring fiscal credibility," Journal of Macroeconomics, Elsevier, vol. 77(C).
    2. 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.
    3. Leonardo Melosi & Francesco Zanetti, 2022. "The Signaling Effects of Fiscal Announcements," Working Paper Series WP 2022-38, Federal Reserve Bank of Chicago.
    4. Bassetto, Marco, 2019. "Forward guidance: Communication, commitment, or both?," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 69-86.
    5. Juan Camilo Galvis-Ciro & Juan Camilo Anzoátegui-Zapata & Cristina Isabel Ramos-Barroso, 2022. "The Effect of Communication and Credibility on Fiscal Disagreement: Empirical Evidence from Colombia," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 18(3), pages 215-238, November.
    6. Tsuruga, Takayuki & Wake, Shota, 2019. "Money-financed fiscal stimulus: The effects of implementation lag," Journal of Economic Dynamics and Control, Elsevier, vol. 104(C), pages 132-151.
    7. Nicolas End, 2020. "Rousseau's social contract or Machiavelli's virtue? A measure of fiscal credibility," AMSE Working Papers 2042, Aix-Marseille School of Economics, France.
    8. Claudio Columbano, 2022. "Measuring fiscal guidance transparency," Public Sector Economics, Institute of Public Finance, vol. 46(2), pages 261-296.

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    More about this item

    Keywords

    news shock; fiscal policy; private information; communication; forward guidance;
    All these keywords.

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)

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