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Forward Guidance for Monetary Policy: Is It Desirable?

In this paper we assess whether forward guidance for monetary policy regarding the future path of interest rates is desirable. We distinguish between two cases where forward guidance for monetary policy may be helpful. First, forward guidance may reveal private information of the central bank. We argue that vague, non-binding statements may be desirable. Second, forward guidance may be used as a commitment device. In this case, policy forecasts may be desirable in a classic inflation-bias framework but not in a New Keynesian framework.

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File URL: http://www.cer.ethz.ch/research/wp_08_84.pdf
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Paper provided by CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich in its series CER-ETH Economics working paper series with number 08/84.

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Length: 21 pages
Date of creation: Apr 2008
Date of revision:
Handle: RePEc:eth:wpswif:08-84
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  1. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
  2. Frederic S. Mishkin, 2004. "Can Central Bank Transparency Go Too Far?," NBER Working Papers 10829, National Bureau of Economic Research, Inc.
  3. Hans Gersbach & Volker Hahn, 2011. "Monetary Policy Inclinations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(8), pages 1707-1717, December.
  4. Glenn D. Rudebusch & John C. Williams, 2006. "Revealing the secrets of the temple: the value of publishing central bank interest rate projections," Working Paper Series 2006-31, Federal Reserve Bank of San Francisco.
  5. Hans Gersbach, 2003. "On the negative social value of central banks' knowledge transparency," Economics of Governance, Springer, vol. 4(2), pages 91-102, 08.
  6. Orphanides, Athanasios & Wieland, Volker, 2000. "Efficient Monetary Policy Design near Price Stability," Journal of the Japanese and International Economies, Elsevier, vol. 14(4), pages 327-365, December.
  7. Xavier Gabaix, 2011. "The Granular Origins of Aggregate Fluctuations," Econometrica, Econometric Society, vol. 79(3), pages 733-772, 05.
  8. William Poole, 2003. "Fed transparency: how, not whether," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 1-8.
  9. Petra M. Geraats, 2002. "Central Bank Transparency," Economic Journal, Royal Economic Society, vol. 112(483), pages 532-565, November.
  10. Joseph Farrell & Matthew Rabin, 1996. "Cheap Talk," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 103-118, Summer.
  11. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  12. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  13. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  14. Gersbach, Hans & Hahn, Volker, 2003. "Signalling and Commitment: Monetary versus Inflation Targeting," CEPR Discussion Papers 4151, C.E.P.R. Discussion Papers.
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