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Forward guidance and heterogenous beliefs

Author

Listed:
  • Gaetano Gaballo

    (Banque de France)

  • Eric Mengus

    (HEC Paris)

  • Benoït Mojon
  • Philippe Andrade

    (Banque de France)

Abstract

We analyze the effects of forward guidance when agents have heterogeneous interpretations of whether forward guidance contains a commitment on future policy actions. Using survey expectations, we document that forward guidance lowered disagreement about future short-term interest rates to historically low levels while it did not affect much disagreement about future inflation and future consumption. We introduce heterogeneous beliefs on future policy and fundamentals in an otherwise standard New-Keynesian model. We show that, because the commitment type of the central bank is unobserved, agreement on the future path of interest rates can coexist with disagreement on the length of the trap. Such heterogeneity of beliefs can strongly mitigate the effectiveness of forward guidance. It also alters the optimal policy at the zero lower bound compared to a situation where beliefs are homogenous.

Suggested Citation

  • Gaetano Gaballo & Eric Mengus & Benoït Mojon & Philippe Andrade, 2016. "Forward guidance and heterogenous beliefs," 2016 Meeting Papers 1182, Society for Economic Dynamics.
  • Handle: RePEc:red:sed016:1182
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    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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