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Uncertain forward guidance

Author

Listed:
  • Haberis, Alex

    (Bank of England)

  • Harrison, Richard

    (Bank of England)

  • Waldron, Matthew

    (Bank of England)

Abstract

We explore the effects of forward guidance at the zero lower bound when there is uncertainty over the lift-off date arising from: (i) the imperfect credibility of time- inconsistent forward-guidance promises; (ii) incomplete communication. We use a simple New Keynesian model to demonstrate that a forward guidance announcement to delay lift-off may be no more powerful in a more interest rate sensitive economy. We also demonstrate that attempts to delay lift-off further may fail to generate additional stimulus if the temptation to renege on the announcement is sufficiently great. In an empirical application, we consider counterfactual policy experiments based on the Federal Open Market Committee’s ‘threshold-based’ forward guidance, in which we link the probability of lift-off to the amount by which the announced unemployment threshold is breached. We show that a more precise articulation of the lift-off conditions requires a lower unemployment threshold in order to deliver the same amount of stimulus as a less precise one.

Suggested Citation

  • Haberis, Alex & Harrison, Richard & Waldron, Matthew, 2017. "Uncertain forward guidance," Bank of England working papers 654, Bank of England.
  • Handle: RePEc:boe:boeewp:0654
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    References listed on IDEAS

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    Cited by:

    1. Tatsushi Okuda & Tomohiro Tsuruga, 2021. "Inflation Expectations and Central Bank Communication with Unknown Prior," IMES Discussion Paper Series 21-E-07, Institute for Monetary and Economic Studies, Bank of Japan.
    2. Nakata, Taisuke & Ogaki, Ryota & Schmidt, Sebastian & Yoo, Paul, 2019. "Attenuating the forward guidance puzzle: Implications for optimal monetary policy," Journal of Economic Dynamics and Control, Elsevier, vol. 105(C), pages 90-106.
    3. Boneva, Lena & Harrison, Richard & Waldron, Matt, 2018. "Threshold-based forward guidance," Journal of Economic Dynamics and Control, Elsevier, vol. 90(C), pages 138-155.
    4. Bielecki, Marcin & Brzoza-Brzezina, Michał & Kolasa, Marcin, 2019. "Comment on “The limits of forward guidance” by Jeffrey R. Campbell, Filippo Ferroni, Jonas D. M. Fisher and Leonardo Melosi," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 135-139.

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    More about this item

    Keywords

    Forward guidance; uncertainty; zero lower bound;
    All these keywords.

    JEL classification:

    • E12 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Keynes; Keynesian; Post-Keynesian; Modern Monetary Theory
    • E17 - Macroeconomics and Monetary Economics - - General Aggregative Models - - - Forecasting and Simulation: Models and Applications
    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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