Forward Guidance and Heterogeneous Beliefs

76 Pages Posted: 29 Jan 2018

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: January 2018

Abstract

Central banks' announcements that future rates are expected to remain low for some time could signal either a weak macroeconomic outlook - which is bad news - or a more accommodative policy stance - which is good news. We use the Survey of Professional Forecasters to show that, when the Fed gave date-based forward guidance between 2011Q3 and 2012Q4, these two interpretations coexisted despite a consensus that rates would stay low for long. We rationalize these facts in an otherwise standard New-Keynesian model where agents: (i) are uncertain about the length of the trap, (ii) have different priors on the commitment ability of the central bank, and (iii) perceive central bank announcements of expected rates as accurate. This heterogeneity of beliefs introduces a trade-off in forward guidance policy: leveraging on the optimism of those who believe the central bank can commit comes at the cost of inducing excess pessimism in non-believers. When pessimistic views prevail, forward guidance can even be detrimental.

Keywords: disagreement, optimal policy, signaling channel, survey forecasts., zero lower bound

JEL Classification: E31, E52, E65

Suggested Citation

Andrade, Philippe and Gaballo, Gaetano and Mengus, Eric and Mojon, Benoît, Forward Guidance and Heterogeneous Beliefs (January 2018). CEPR Discussion Paper No. DP12650. Available at SSRN: https://ssrn.com/abstract=3112274

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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