Forward Guidance and Heterogeneous Beliefs

56 Pages Posted: 23 Oct 2015

See all articles by Philippe Andrade

Philippe Andrade

Federal Reserve Banks - Federal Reserve Bank of Boston

Gaetano Gaballo

Banque de France

Eric Mengus

HEC Paris - Economics & Decision Sciences

Benoît Mojon

Bank for International Settlements (BIS)

Multiple version iconThere are 4 versions of this paper

Date Written: October 2015

Abstract

We analyze the effects of forward guidance when agents have heterogeneous interpretations of whether forward guidance contains a commitment on future policy actions. Using survey expectations, we document that forward guidance lowered disagreement about future short-term interest rates to historically low levels while it did not affect much disagreement about future inflation and future consumption. We introduce heterogenous beliefs on future policy and fundamentals in an otherwise standard New-Keynesian model. We show that, because the commitment type of the central bank is unobserved, agreement on the future path of interest rates can coexist with disagreement on the length of the trap. Such heterogeneity of beliefs can strongly mitigate the effectiveness of forward guidance. It also alters the optimal policy at the zero lower bound compared to a situation where beliefs are homogenous.

Keywords: monetary policy, forward guidance, communication, heterogeneous beliefs, disagreement

JEL Classification: E31, E52, E65

Suggested Citation

Andrade, Philippe and Gaballo, Gaetano and Mengus, Eric and Mojon, Benoît, Forward Guidance and Heterogeneous Beliefs (October 2015). Available at SSRN: https://ssrn.com/abstract=2677644 or http://dx.doi.org/10.2139/ssrn.2677644

Philippe Andrade (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of Boston ( email )

600 Atlantic Avenue
Boston, MA 02210
United States

Gaetano Gaballo

Banque de France ( email )

Paris
France

Eric Mengus

HEC Paris - Economics & Decision Sciences ( email )

Paris
France

Benoît Mojon

Bank for International Settlements (BIS) ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

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