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Higher-order forward guidance

Author

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  • Dordal i Carreras, Marc
  • Lee, Seung Joo

Abstract

This paper develops a model of business cycles with endogenous volatility at the zero lower bound (ZLB) and central-bank forward guidance. We deliver three main results. First, a credible commitment to future stabilization curbs excess volatility at the ZLB. Second, pledging not to stabilize later can shift the economy onto more favorable equilibrium paths, exposing a trade-off between future stabilization and reduced aggregate volatility at the ZLB. Third, keeping the timing of future stabilization uncertain strictly dominates other forward-guidance strategies.

Suggested Citation

  • Dordal i Carreras, Marc & Lee, Seung Joo, 2026. "Higher-order forward guidance," Journal of Economic Theory, Elsevier, vol. 231(C).
    • Handle: RePEc:eee:jetheo:v:231:y:2026:i:c:s0022053125001541
    DOI: 10.1016/j.jet.2025.106108
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    References listed on IDEAS

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