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The Power of Forward Guidance Revisited


  • Alisdair McKay
  • Emi Nakamura
  • Jón Steinsson


In recent years, central banks have increasingly turned to forward guidance as a central tool of monetary policy. Standard monetary models imply that far future forward guidance has huge effects on current outcomes, and these effects grow with the horizon of the forward guidance. We present a model in which the power of forward guidance is highly sensitive to the assumption of complete markets. When agents face uninsurable income risk and borrowing constraints, a precautionary savings effect tempers their responses to changes in future interest rates. As a consequence, forward guidance has substantially less power to stimulate the economy.

Suggested Citation

  • Alisdair McKay & Emi Nakamura & Jón Steinsson, 2016. "The Power of Forward Guidance Revisited," American Economic Review, American Economic Association, vol. 106(10), pages 3133-3158, October.
  • Handle: RePEc:aea:aecrev:v:106:y:2016:i:10:p:3133-58 Note: DOI: 10.1257/aer.20150063

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    References listed on IDEAS

    1. Martin Floden & Jesper Lindé, 2001. "Idiosyncratic Risk in the United States and Sweden: Is There a Role for Government Insurance?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(2), pages 406-437, July.
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    3. Gornemann, Nils & Kuester, Keith & Nakajima, Makoto, 2016. "Doves for the Rich, Hawks for the Poor? Distributional Consequences of Monetary Policy," CEPR Discussion Papers 11233, C.E.P.R. Discussion Papers.
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    6. Carroll, Christopher D., 2006. "The method of endogenous gridpoints for solving dynamic stochastic optimization problems," Economics Letters, Elsevier, vol. 91(3), pages 312-320, June.
    7. Adrien Auclert, 2015. "Monetary Policy and the Redistribution Channel," 2015 Meeting Papers 381, Society for Economic Dynamics.
    8. Oh, Hyunseung & Reis, Ricardo, 2012. "Targeted transfers and the fiscal response to the great recession," Journal of Monetary Economics, Elsevier, vol. 59(S), pages 50-64.
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    JEL classification:

    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • 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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