Forward Guidance

45 Pages Posted: 16 Apr 2018 Last revised: 30 Apr 2018

See all articles by Marcus Hagedorn

Marcus Hagedorn

University of Oslo - Department of Economics

Jinfeng Luo

University of Pennsylvania

Iourii Manovskii

University of Pennsylvania - Department of Economics; IZA Institute of Labor Economics

Kurt Mitman

IIES

Date Written: April 2018

Abstract

We assess the power of forward guidance - promises about future interest rates - as a monetary tool in a liquidity trap using a quantitative incomplete-markets model. Our results suggest the effects of forward guidance are negligible. A commitment to keep future nominal interest rates low for a few quarters-although macro indicators suggest otherwise-has only trivial effects on current output and employment. We explain theoretically why in complete markets models forward guidance is powerful-generating a "forward guidance puzzle"-and why this puzzle disappears in our model. We also clarify theoretically ambiguous conclusions from previous research about the effectiveness of forward guidance in incomplete and complete markets models.

Keywords: forward guidance, incomplete markets, monetary policy

Suggested Citation

Hagedorn, Marcus and Luo, Jinfeng and Manovskii, Iourii and Mitman, Kurt, Forward Guidance (April 2018). CEPR Discussion Paper No. DP12858. Available at SSRN: https://ssrn.com/abstract=3163490

Marcus Hagedorn (Contact Author)

University of Oslo - Department of Economics ( email )

P.O. Box 1095 Blindern
N-0317 Oslo
Norway

Jinfeng Luo

University of Pennsylvania ( email )

Philadelphia, PA 19104
United States

Iourii Manovskii

University of Pennsylvania - Department of Economics ( email )

Ronald O. Perelman Center for Political Science
133 South 36th Street
Philadelphia, PA 19104-6297
United States
215-898-6880 (Phone)
215-573-2057 (Fax)

HOME PAGE: http://www.econ.upenn.edu/~manovski/

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Kurt Mitman

IIES ( email )

Stockholm, SE-10691
Sweden

HOME PAGE: http://kurtmitman.com

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