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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 distortionary future policy shocks 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, 2020. "Fiscal forward guidance: A case for selective transparency," Journal of Monetary Economics, Elsevier, vol. 116(C), pages 236-248.
  • Handle: RePEc:eee:moneco:v:116:y:2020:i:c:p:236-248
    DOI: 10.1016/j.jmoneco.2019.10.007
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    Cited by:

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    More about this item

    Keywords

    Fiscal policy; Private information; Forward guidance; News shock; Bayesian persuasion;
    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
    • 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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