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Forward guidance and heterogenous beliefs

Listed author(s):
  • Gaetano Gaballo

    (Banque de France)

  • Eric Mengus

    (HEC Paris)

  • Benoït Mojon
  • Philippe Andrade

    (Banque de France)

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.

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File URL: https://economicdynamics.org/meetpapers/2016/paper_1182.pdf
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Paper provided by Society for Economic Dynamics in its series 2016 Meeting Papers with number 1182.

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Date of creation: 2016
Handle: RePEc:red:sed016:1182
Contact details of provider: Postal:
Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA

Web page: http://www.EconomicDynamics.org/
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