Forward Guidance and Heterogeneous Beliefs

65 Pages Posted: 3 Feb 2017 Last revised: 14 Mar 2017

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: November 1, 2016

Abstract

Central banks' announcements that future interest rates will remain low could signal either a weak future macroeconomic outlook - which is bad news - or a future expansionary monetary policy - which is good news. In this paper, we use the Survey of Professional Forecasters to show that these two interpretations coexisted when the Fed engaged into date-based forward guidance policy between 2011Q3 and 2012Q4. We then extend an otherwise standard New-Keynesian model to study the consequences of such heterogeneous interpretations. We show that it can strongly mitigate the effectiveness of forward guidance and that the presence of few pessimists may require keeping rates low for longer. However, when pessimists are sufficiently numerous forward guidance can even be detrimental.

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 (November 1, 2016). HEC Paris Research Paper No. ECO/SCD-2017-1192. Available at SSRN: https://ssrn.com/abstract=2911005 or http://dx.doi.org/10.2139/ssrn.2911005

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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