Affiliation:
1. Department of Economics, University of Lausanne, Internef, Quartier Chamberonne, CH-1015, Lausanne, Switzerland and the Center for Economic and Policy Research (CEPR) (email: )
Abstract
Optimal forward guidance is the simple policy of keeping interest rates low for some optimally determined number of periods after the liquidity trap ends and moving to normal-times optimal policy thereafter. I solve for the optimal duration in closed form in a new Keynesian model and show that it is close to fully optimal Ramsey policy. The simple rule “announce a duration of half of the trap’s duration times the disruption” is a good approximation, including in a medium-scale dynamic stochastic general equilibrium (DSGE) model. By anchoring expectations of Delphic agents (who mistake commitment for bad news), the simple rule is also often welfare-preferable to Odyssean commitment. (JEL D84, E12, E43, E52, E56)
Publisher
American Economic Association
Subject
General Economics, Econometrics and Finance
Cited by
15 articles.
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1. Odyssean forward guidance in normal times;Journal of Economic Dynamics and Control;2024-08
2. Understanding Persistent ZLB: Theory and Assessment;American Economic Journal: Macroeconomics;2024-07-01
3. Monetary Policy and Heterogeneity: An Analytical Framework;Review of Economic Studies;2024-06-26
4. Can Supply Shocks Be Inflationary with a Flat Phillips Curve?;Working paper (Federal Reserve Bank of Cleveland);2023-12-28
5. Credible Forward Guidance;Journal of Economic Dynamics and Control;2023-08