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Can Discounting Alone Resolve the Forward Guidance Puzzle?

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  • Ji, Yangyang

Abstract

Numerically, we examine the expansionary effects of forward guidance at different horizons in Gabaix’s (2020) model and find that the role of discounting is limited and that unrealistic assumptions about parameter calibration are also required to resolve the forward guidance puzzle. We extend Gabaix’s (2020) model to include wage stickiness and find that discounting alone can resolve the puzzle even assuming standard calibration.

Suggested Citation

  • Ji, Yangyang, 2022. "Can Discounting Alone Resolve the Forward Guidance Puzzle?," MPRA Paper 115353, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:115353
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    References listed on IDEAS

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    More about this item

    Keywords

    Forward Guidance Puzzle; Discounting; New Keynesian Model; Wage Stickiness;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E21 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Consumption; Saving; Wealth
    • E23 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - Production
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory

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