Forward Guidance and Heterogeneous Beliefs

61 Pages Posted: 7 Jan 2019

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: October 1, 2018

Abstract

Central banks' announcements that rates are expected to remain low could signal either a weak macroeconomic outlook, which would slow expenditures, or a more accommodative stance, which may stimulate economic activity. We use the Survey of Professional Forecasters to show that, when the Fed gave guidance between 2011Q3 and 2012Q4, these two interpretations coexisted despite a consensus on low expected rates. We rationalize these facts in a New-Keynesian model where heterogeneous beliefs introduce a trade-o in forward guidance policy: leveraging on the optimism of those who believe in monetary easing comes at the cost of inducing excess pessimism in non-believers.

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

JEL Classification: E31, E52, E65

Suggested Citation

Andrade, Philippe and Gaballo, Gaetano and Mengus, Eric and Mojon, Benoît, Forward Guidance and Heterogeneous Beliefs (October 1, 2018). BIS Working Paper No. 750. Available at SSRN: https://ssrn.com/abstract=3301609

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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