Interest rate spreads and forward guidance
62 Pages Posted: 22 Oct 2018
Date Written: October 16, 2018
We provide evidence that liquidity premia on assets that are more relevant for private agents' intertemporal choices than near-money assets increase in response to expansionary forward guidance announcements. We introduce a structural specification of liquidity premia based on assets' differential pledgeability to a basic New Keynesian model to replicate this finding. This model predicts that output and inflation effects of forward guidance do not increase with the length of the guidance period and are substantially smaller than if liquidity premia were neglected. This indicates that there are no puzzling forward guidance effects when endogenous liquidity premia are taken into account.
Keywords: Forward guidance, Unconventional monetary policy, Liquidity premium
JEL Classification: E32, E42, E52
Suggested Citation: Suggested Citation