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Versatile forward guidance: escaping or switching?

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  • Gersbach, Hans
  • Liu, Yulin
  • Tischhauser, Martin

Abstract

We examine forward guidance when an economy faces negative natural real interest rates and subsequent supply shocks. We introduce two versatile designs: escaping and switching. In the former, the central bank escapes low interest-rate commitment when inflation reaches a self-chosen threshold. In the latter, the central bank can switch from interest-rate forecasts to inflation forecasts any time. Central bankers are scrupulous and face intrinsic (or extrinsic) costs when they deviate from their policy announcements in the future. We show that switching forward guidance is preferable over escaping forward guidance if and only if negative real interest rate shocks are moderate. Furthermore, with the polynomial chaos expansion method and Sobol’ Indices, we identify the decisive parameters and show that our findings are globally robust to parameter uncertainty.

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  • Gersbach, Hans & Liu, Yulin & Tischhauser, Martin, 2021. "Versatile forward guidance: escaping or switching?," Journal of Economic Dynamics and Control, Elsevier, vol. 127(C).
    • Handle: RePEc:eee:dyncon:v:127:y:2021:i:c:s0165188921000221
    DOI: 10.1016/j.jedc.2021.104087
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    3. Xin Xu & Xiaoguang Xu, 2023. "Forward guidance investigation in new Keynesian models," Economic Research-Ekonomska Istraživanja, Taylor & Francis Journals, vol. 36(2), pages 2145983-214, July.

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    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E49 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Other
    • 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

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