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Forward Guidance and Heterogeneous Beliefs

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  • Andrade, Philippe

    ()

  • Gaballo, Gaetano

    ()

  • Mengus, Eric

    ()

  • Mojon, Benoît

    ()

Abstract

Central banks' announcements that future interest rates will remain low could signal either a weak future macroeconomic outlook - which is bad news - or a future expansionary monetary policy - which is good news. In this paper, we use the Survey of Professional Forecasters to show that these two interpretations coexisted when the Fed engaged into date-based forward guidance policy between 2011Q3 and 2012Q4. We then extend an otherwise standard New-Keynesian model to study the consequences of such heterogeneous interpretations. We show that it can strongly mitigate the effectiveness of forward guidance and that the presence of few pessimists may require keeping rates low for longer. However, when pessimists are sufficiently numerous forward guidance can even be detrimental.

Suggested Citation

  • Andrade, Philippe & Gaballo, Gaetano & Mengus, Eric & Mojon, Benoît, 2016. "Forward Guidance and Heterogeneous Beliefs," HEC Research Papers Series 1192, HEC Paris.
  • Handle: RePEc:ebg:heccah:1192
    DOI: 10.2139/ssrn.2911005
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    Keywords

    monetary policy; forward guidance; communication; heterogeneous beliefs; disagreement;
    All these keywords.

    JEL classification:

    • A10 - General Economics and Teaching - - General Economics - - - General

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