Forward Guidance for Monetary Policy: Is It Desirable?
CER-ETH - Center of Economic Research at ETH Zurich, Working Paper No. 08/84
21 Pages Posted: 3 Apr 2008
Date Written: April 1, 2008
In this paper we assess whether forward guidance for monetary policy regarding the future path of interest rates is desirable. We distinguish between two cases where forward guidance for monetary policy may be helpful. First, forward guidance may reveal private information of the central bank. We argue that vague, non-binding statements may be desirable. Second, forward guidance may be used as a commitment device. In this case, policy forecasts may be desirable in a classic inflation-bias framework but not in a New Keynesian framework.
Keywords: central banks, transparency, commitment, Federal Reserve, policy inclinations, signaling
JEL Classification: E58, D70
Suggested Citation: Suggested Citation