Mitigating the Forward Guidance Puzzle: Inattention, Credibility, Finite Planning Horizons and Learning

32 Pages Posted: 25 Jun 2020

See all articles by Oliver Groot

Oliver Groot

European Central Bank (ECB)

Falk Mazelis

European Central Bank (ECB)

Date Written: June, 2020

Abstract

This paper develops a simple, consistent methodology for generating empirically realistic forward guidance simulations using existing macroeconomic models by modifying expectations about policy announcements. The main advantage of our method lies in the exact preservation of all other shock transmissions. We describe four scenarios regarding how agents incorporate information about future interest rate announcements: “inattention”, “credibility”, “finite planning horizon”, and “learning”. The methodology consists of describing a single loading matrix that augments the equilibrium decision rules and can be applied to any standard DSGE, including large-scale policy-institution models. Finally, we provide conditions under which the forward guidance puzzle is resolved.

Keywords: expectations, monetary policy, unconventional policy

JEL Classification: C63, E32, E52

Suggested Citation

Groot, Oliver and Mazelis, Falk, Mitigating the Forward Guidance Puzzle: Inattention, Credibility, Finite Planning Horizons and Learning (June, 2020). ECB Working Paper No. 20202426, Available at SSRN: https://ssrn.com/abstract=3634528

Oliver Groot (Contact Author)

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Falk Mazelis

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

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