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Stabilization And Commitment: Forward Guidance In Economies With Rational Expectations

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  • Hughes Hallett, Andrew
  • Acocella, Nicola

Abstract

We construct a theory of forward guidance in economic policy making in order to provide a framework for explaining the role and strategic advantages of including forward guidance as an explicit part of policy design. We do this by setting up a general policy problem in which forward guidance plays a role, and then examine the consequences for performance when that guidance is withdrawn. We show that forward guidance provides enhanced controllability and stabilizability—especially where such properties may not otherwise be available. As a by-product, we find that forward guidance limits the scope and incentives for time-inconsistent behavior in an economy whose policy goals are ultimately reachable. It also adds to the credibility of a set of policies.

Suggested Citation

  • Hughes Hallett, Andrew & Acocella, Nicola, 2018. "Stabilization And Commitment: Forward Guidance In Economies With Rational Expectations," Macroeconomic Dynamics, Cambridge University Press, vol. 22(1), pages 122-134, January.
    • Handle: RePEc:cup:macdyn:v:22:y:2018:i:01:p:122-134_00
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    Cited by:

    1. Hallett, Andrew Hughes & Acocella, Nicola, 2019. "Forward guidance reassessed: Stabilizability under endogenous policy rules," Journal of Macroeconomics, Elsevier, vol. 59(C), pages 325-335.
    2. Acocella, Nicola, 2022. "The Current Status of Economic Policy as a Discipline," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 75(4), pages 391-406.

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