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Odyssean forward guidance in normal times

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  • Maliar, Lilia
  • Taylor, John B.

Abstract

We present a systematic treatment of dynamic effects of Odyssean forward guidance – explicit announcements about future policy rates. We focus on normal times unlike the mainstream of the literature that focuses on episodes of an effective (zero) lower bound on nominal interest rates. We present novel closed-form solutions to both deterministic and stochastic versions of a stylized new Keynesian model with fully anticipated future shocks. We establish a theorem that delineates the parameter space into real and complex-root regions characterized by different characteristic roots. We formulate a simple recipe for testing the effectiveness of forward guidance: the size of the smallest root is a single sufficient statistics that determines whether or not forward guidance generates significant contemporaneous effects.

Suggested Citation

  • Maliar, Lilia & Taylor, John B., 2024. "Odyssean forward guidance in normal times," Journal of Economic Dynamics and Control, Elsevier, vol. 165(C).
    • Handle: RePEc:eee:dyncon:v:165:y:2024:i:c:s0165188924000691
    DOI: 10.1016/j.jedc.2024.104877
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    More about this item

    Keywords

    Forward guidance; New Keynesian model; Taylor rule;
    All these keywords.

    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • C63 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computational Techniques
    • C68 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Computable General Equilibrium Models
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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