DP16020 The Delphic forward guidance puzzle in New Keynesian models

Author(s): Ippei Fujiwara, Yuichiro Waki
Publication Date: April 2021
Keyword(s): Bayesian persuasion, forward guidance, New Keynesian models, news shock, Optimal monetary policy, private information
JEL(s): E30, E40, E50
Programme Areas: International Macroeconomics and Finance, Monetary Economics and Fluctuations
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=16020

When the central bank has information that can help the private sector better predict the future, should it communicate such information to the public? In purely forward-looking New Keynesian models, such Delphic forward guidance unambiguously reduces ex ante welfare by increasing the variability of inflation and the output gap. We call this phenomenon the Delphic forward guidance puzzle. In more elaborate models with endogenous state variables, a combination of Delphic forward guidance and preemptive policy actions may improve welfare. However, full information revelation is generally not optimal and what information needs to be revealed is highly model-dependent.