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

See all articles by Hans Gersbach

Hans Gersbach

ETH Zurich - CER-ETH -Center of Economic Reseaarch; IZA Institute of Labor Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

Volker Hahn

University of Konstanz

Date Written: April 1, 2008

Abstract

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

Gersbach, Hans and Hahn, Volker, Forward Guidance for Monetary Policy: Is It Desirable? (April 1, 2008). Available at SSRN: https://ssrn.com/abstract=1115829 or http://dx.doi.org/10.2139/ssrn.1115829

Hans Gersbach (Contact Author)

ETH Zurich - CER-ETH -Center of Economic Reseaarch ( email )

Zürichbergstrasse 18
Zurich, 8092
Switzerland
+41 44 632 82 80 (Phone)
+41 44 632 18 30 (Fax)

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

CESifo (Center for Economic Studies and Ifo Institute)

Poschinger Str. 5
Munich, DE-81679
Germany

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Volker Hahn

University of Konstanz ( email )

Box 143
Konstanz, 78457
Germany

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