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Forward guidance investigation in new Keynesian models

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  • Xin Xu
  • Xiaoguang Xu

Abstract

Forward guidance is widely considered a useful tool for improving monetary policy transmission. This paper introduces endogenous Delphic guidance in which future policy targets are time-varying and dependent on the future economy. The results show that the performance of inflation-targeting forward guidance depends partially on the forward horizon and the agents’ expectation, while announcing an interim output target could stimulate the economy only under a rational expectation environment and requires a short forward horizon. We also discuss the effectiveness of Odyssean forward guidance which incorporates monetary authorities’ preferences. The results indicate that the effect of a commitment on future paths of an interest-rate rule is based on the agents’ expectations.

Suggested Citation

  • 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.
    • Handle: RePEc:taf:reroxx:v:36:y:2023:i:2:p:2145983
    DOI: 10.1080/1331677X.2022.2145983
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