Forward Guidance and Heterogeneous Beliefs
61 Pages Posted: 7 Jan 2019
Date Written: October 1, 2018
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: Suggested Citation