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The Stabilizing Role of Forward Guidance: A Macro Experiment

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  • Ahrens, Steffen
  • Lustenhouwer, Joep
  • Tettamanzi, Michele

Abstract

We study if central banks can manage market expectations by means of forward guidance in a New Keynesian learning-to-forecast experiment. Subjects observe public inflation projections by the central bank along with the historic development of the economy and subsequently submit their own inflation forecasts. We find that the central bank can significantly manage market expectations through forward guidance and that this management strongly supports monetary policy in stabilizing the economy.

Suggested Citation

  • Ahrens, Steffen & Lustenhouwer, Joep & Tettamanzi, Michele, 2017. "The Stabilizing Role of Forward Guidance: A Macro Experiment," VfS Annual Conference 2017 (Vienna): Alternative Structures for Money and Banking 168063, Verein für Socialpolitik / German Economic Association.
    • Handle: RePEc:zbw:vfsc17:168063
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    3. Fatemeh Mokhtarzadeh & Luba Petersen, 2021. "Coordinating expectations through central bank projections," Experimental Economics, Springer;Economic Science Association, vol. 24(3), pages 883-918, September.
    4. Camille Cornand & Frank Heinemann, 2018. "Experiments on macroeconomics: methods and applications," Working Papers 1810, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    5. Hommes, Cars & Makarewicz, Tomasz, 2021. "Price level versus inflation targeting under heterogeneous expectations: a laboratory experiment," Journal of Economic Behavior & Organization, Elsevier, vol. 182(C), pages 39-82.
    6. Hommes, Cars, 2018. "Behavioral & experimental macroeconomics and policy analysis: a complex systems approach," Working Paper Series 2201, European Central Bank.
    7. Mundt, Philipp & Oh, Ilfan, 2019. "Asymmetric competition, risk, and return distribution," BERG Working Paper Series 145, Bamberg University, Bamberg Economic Research Group.
    8. Mundt, Philipp & Alfarano, Simone & Milaković, Mishael, 2020. "Survival and the ergodicity of corporate profitability," BERG Working Paper Series 162, Bamberg University, Bamberg Economic Research Group.
    9. Duffy, John & Heinemann, Frank, 2021. "Central bank reputation, cheap talk and transparency as substitutes for commitment: Experimental evidence," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 887-903.
    10. Ryan Rholes & Luba Petersen, 2020. "Should central banks communicate uncertainty in their projections?," Discussion Papers dp20-01, Department of Economics, Simon Fraser University.
    11. Christian R. Proaño & Benjamin Lojak, 2019. "Animal spirits, risk premia and monetary policy at the zero lower bound," CAMA Working Papers 2019-73, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    12. Gavin Goy & Cars Homme & Kostas Mavromatis, 2018. "Forward Guidance and the Role of Central Bank Credibility," DNB Working Papers 614, Netherlands Central Bank, Research Department.

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    More about this item

    JEL classification:

    • C92 - Mathematical and Quantitative Methods - - Design of Experiments - - - Laboratory, Group Behavior
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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