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Forward Guidance and Heterogeneous Beliefs

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  • Andrade, Philippe
  • Gaballo, Gaetano
  • Mengus, Eric
  • Mojon, Benoit

Abstract

Central banks' announcements that future rates are expected to remain low for some time could signal either a weak macroeconomic outlook - which is bad news - or a more accommodative policy stance - which is good news. We use the Survey of Professional Forecasters to show that, when the Fed gave date-based forward guidance between 2011Q3 and 2012Q4, these two interpretations coexisted despite a consensus that rates would stay low for long. We rationalize these facts in an otherwise standard New-Keynesian model where agents: (i) are uncertain about the length of the trap, (ii) have different priors on the commitment ability of the central bank, and (iii) perceive central bank announcements of expected rates as accurate. This heterogeneity of beliefs introduces a trade-off in forward guidance policy: leveraging on the optimism of those who believe the central bank can commit comes at the cost of inducing excess pessimism in non-believers. When pessimistic views prevail, forward guidance can even be detrimental.

Suggested Citation

  • Andrade, Philippe & Gaballo, Gaetano & Mengus, Eric & Mojon, Benoit, 2018. "Forward Guidance and Heterogeneous Beliefs," CEPR Discussion Papers 12650, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:12650
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    More about this item

    Keywords

    disagreement; optimal policy; signaling channel; survey forecasts.; zero lower bound;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E65 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Studies of Particular Policy Episodes

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