Citation

Discussion Paper Details

Please find the details for DP12650 in an easy to copy and paste format below:

Full Details   |   Bibliographic Reference

Full Details

Title: Forward Guidance and Heterogeneous Beliefs

Author(s): Philippe Andrade, Gaetano Gaballo, Eric Mengus and Benoit Mojon

Publication Date: January 2018

Keyword(s): disagreement, optimal policy, signaling channel, Survey Forecasts and zero lower bound

Programme Area(s): Monetary Economics and Fluctuations

Abstract: Central banks' announcements that future rates are expected to remain low for some time could signal either a weak macroeconomic outlook - which is bad news - or a more accommodative policy stance - which is good news. We use the Survey of Professional Forecasters to show that, when the Fed gave date-based forward guidance between 2011Q3 and 2012Q4, these two interpretations coexisted despite a consensus that rates would stay low for long. We rationalize these facts in an otherwise standard New-Keynesian model where agents: (i) are uncertain about the length of the trap, (ii) have different priors on the commitment ability of the central bank, and (iii) perceive central bank announcements of expected rates as accurate. This heterogeneity of beliefs introduces a trade-off in forward guidance policy: leveraging on the optimism of those who believe the central bank can commit comes at the cost of inducing excess pessimism in non-believers. When pessimistic views prevail, forward guidance can even be detrimental.

For full details and related downloads, please visit: https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12650

Bibliographic Reference

Andrade, P, Gaballo, G, Mengus, E and Mojon, B. 2018. 'Forward Guidance and Heterogeneous Beliefs'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=12650