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Optimal Central Bank Forward Guidance

Author

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  • Eunmi Ko

    (Rochester Institute of Technology)

Abstract

When the future state of the economy is uncertain, yet a central bank has more information about the possible scenarios, how should the central bank communicate its private information to the public? This paper analyzes the optimal tone of central bank Delphic forward guidance using the Bayesian persuasion model (Kamenica and Gentzkow 2011). Assuming that monetary policy is an exogenously given function over the states of the economy and that the central bank is precommitted to a forward-guidance policy function, under certain conditions, the optimal tone of communication about the uncertain future is overly pessimistic.

Suggested Citation

  • Eunmi Ko, 2023. "Optimal Central Bank Forward Guidance," International Journal of Central Banking, International Journal of Central Banking, vol. 19(4), pages 401-447, October.
    • Handle: RePEc:ijc:ijcjou:y:2023:q:4:a:9
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    References listed on IDEAS

    as
    1. Bassetto, Marco, 2019. "Forward guidance: Communication, commitment, or both?," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 69-86.
    2. Jan F. Qvigstad, 2006. "When does an interest rate path “look good”? Criteria for an appropriate future interest rate path," Working Paper 2006/05, Norges Bank.
    3. Ippei Fujiwara & Yuichiro Waki, 2019. "Private news and monetary policy - Forward guidance as Bayesian persuasion," CAMA Working Papers 2019-91, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
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    Cited by:

    1. Ko, Eunmi, 2024. "An affine term structure model with Fed chairs’ speeches," Finance Research Letters, Elsevier, vol. 63(C).

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • 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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