Forward Guidance and the State of the Economy

32 Pages Posted: 28 Aug 2017

See all articles by Benjamin D. Keen

Benjamin D. Keen

University of Oklahoma - Department of Economics

Alexander W. Richter

Federal Reserve Bank of Dallas

Nathaniel A. Throckmorton

William & Mary

Multiple version iconThere are 3 versions of this paper

Date Written: October 2017

Abstract

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.

JEL Classification: E43, E58, E61

Suggested Citation

Keen, Benjamin D. and Richter, Alexander W. and Throckmorton, Nathaniel A., Forward Guidance and the State of the Economy (October 2017). Economic Inquiry, Vol. 55, Issue 4, pp. 1593-1624, 2017, Available at SSRN: https://ssrn.com/abstract=3026800 or http://dx.doi.org/10.1111/ecin.12466

Benjamin D. Keen (Contact Author)

University of Oklahoma - Department of Economics ( email )

729 Elm Avenue
Norman, OK 73019-2103
United States

Alexander W. Richter

Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5360 (Phone)

HOME PAGE: http://alexrichterecon.com

Nathaniel A. Throckmorton

William & Mary ( email )

Economics Department
P.O. Box 8795
Williamsburg, VA 23187
United States

HOME PAGE: http://nathrockmorton.people.wm.edu/

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