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Beliefs formation and the puzzle of forward guidance power

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  • Beqiraj, Elton
  • Di Bartolomeo, Giovanni
  • Di Pietro, Marco

Abstract

We study the extent to which the belief-formation process affects the dynamics of macroeconomic variables when the central bank uses forward guidance. Recent literature has emphasized two kinds of puzzle associated to forward guidance. First, standard sticky-price models imply that far future forward guidance has huge and implausible effects on current outcomes, these effects grow in its horizon. Second, these models tend to overestimate the effects of central bank’s commitment to keep interest rate below the natural rate for a given period of time. Focusing on the former puzzle, by a parsimonious macro-model that allows for the role of bounded rationality and heterogeneous agents, we obtain tempered responses for both real and nominal variables.

Suggested Citation

  • Beqiraj, Elton & Di Bartolomeo, Giovanni & Di Pietro, Marco, 2019. "Beliefs formation and the puzzle of forward guidance power," Journal of Macroeconomics, Elsevier, vol. 60(C), pages 20-32.
    • Handle: RePEc:eee:jmacro:v:60:y:2019:i:c:p:20-32
    DOI: 10.1016/j.jmacro.2019.01.001
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    Cited by:

    1. Beqiraj Elton & Di Bartolomeo Giovanni & Serpieri Carolina, 2017. "Bounded-rationality and heterogeneous agents: Long or short forecasters?," wp.comunite 00132, Department of Communication, University of Teramo.
    2. Francesco Salsano, 2022. "Monetary policy when the objectives of central bankers are imperfectly observable," Scottish Journal of Political Economy, Scottish Economic Society, vol. 69(4), pages 396-415, September.
    3. Elton Beqiraj & Giovanni Di Bartolomeo & Marco Di Pietro & Carolina Serpieri, 2020. "Bounded rationality and heterogeneous expectations: Euler versus anticipated-utility approach," Journal of Economics, Springer, vol. 130(3), pages 249-273, August.
    4. Müller, Tobias & Christoffel, Kai & Mazelis, Falk & Montes-Galdón, Carlos, 2022. "Disciplining expectations and the forward guidance puzzle," Journal of Economic Dynamics and Control, Elsevier, vol. 137(C).
    5. André Marine Charlotte & Traficante Guido, 2021. "Forward Guidance in an Advanced Small Open Economy in the Effective Lower Bound," Working Papers 2021-16, Banco de México.
    6. Giovanni Di Bartolomeo & Carolina Serpieri, 2018. "Robust Optimal Policies in a Behavioural New Keynesian Model," JRC Research Reports JRC111603, Joint Research Centre.
    7. Carola Conces Binder, 2021. "Central Bank Communication and Disagreement about the Natural Rate Hypothesis," International Journal of Central Banking, International Journal of Central Banking, vol. 17(2), pages 81-123, June.
    8. Agustín Arias & Benjamín García & Ignacio Rojas, 2023. "Forward Guidance: Estimating a Behavioral DSGE Model with System Priors," Working Papers Central Bank of Chile 994, Central Bank of Chile.
    9. Masek, Frantisek & Zemlicka, Jan, 2024. "Average inflation targeting: how far to look into the past and the future?," Working Paper Series 2955, European Central Bank.

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    More about this item

    Keywords

    Forward guidance power; Heterogeneous agents; Bounded rationality; Monetary policy; Announcements;
    All these keywords.

    JEL classification:

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

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