Forward Guidance and the State of the Economy
39 Pages Posted: 26 Dec 2013 Last revised: 6 May 2017
Date Written: April 13, 2017
This paper analyzes forward guidance in a nonlinear model with a zero lower bound (ZLB) on the nominal interest rate. Forward guidance is modeled with news shocks to the monetary policy rule, which capture innovations in expectations from central bank communication about future policy rates. Whereas most studies use quasi-linear models that disregard the expectational effects of hitting the ZLB, we show how the effectiveness of forward guidance nonlinearly depends on the state of the economy, the speed of the recovery, the degree of uncertainty, the policy shock size, and the forward guidance horizon when households account for the ZLB.
Keywords: Forward Guidance; Zero Lower Bound; News Shocks; Nonlinear Solution Method
JEL Classification: E43; E58; E61
Suggested Citation: Suggested Citation