Optimal Forward Guidance

Details

Serval ID
serval:BIB_67BAC1D775B3
Type
Article: article from journal or magazin.
Collection
Publications
Institution
Title
Optimal Forward Guidance
Journal
American Economic Journal: Macroeconomics
Author(s)
Bilbiie  F.O.
Publication state
In Press
Peer-reviewed
Oui
Language
english
Abstract
Optimal forward guidance is the simple policy of keeping interest rates low for some optimally-determined number of periods after the liquidity trap ends and moving to normal-times optimal policy thereafter. I solve for the optimal duration in closed form in a new-Keynesian model and show that it is close to fully-optimal Ramsey policy. The simple rule "announce a duration of half of the trapís duration times the disruption" is a good approximation, including in a medium-scale DSGE model. By anchoring expectations of delphic agents (who mistake commitment for bad news), the simple rule is also often welfare-preferable to odyssean commitment.
Create date
03/04/2019 11:33
Last modification date
21/08/2019 6:16
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