IDEAS home Printed from https://ideas.repec.org/a/taf/reroxx/v36y2023i2p2145983.html
   My bibliography  Save this article

Forward guidance investigation in new Keynesian models

Author

Listed:
  • Xin Xu
  • Xiaoguang Xu

Abstract

Forward guidance is widely considered a useful tool for improving monetary policy transmission. This paper introduces endogenous Delphic guidance in which future policy targets are time-varying and dependent on the future economy. The results show that the performance of inflation-targeting forward guidance depends partially on the forward horizon and the agents’ expectation, while announcing an interim output target could stimulate the economy only under a rational expectation environment and requires a short forward horizon. We also discuss the effectiveness of Odyssean forward guidance which incorporates monetary authorities’ preferences. The results indicate that the effect of a commitment on future paths of an interest-rate rule is based on the agents’ expectations.

Suggested Citation

  • Xin Xu & Xiaoguang Xu, 2023. "Forward guidance investigation in new Keynesian models," Economic Research-Ekonomska Istraživanja, Taylor & Francis Journals, vol. 36(2), pages 2145983-214, July.
    • Handle: RePEc:taf:reroxx:v:36:y:2023:i:2:p:2145983
    DOI: 10.1080/1331677X.2022.2145983
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1080/1331677X.2022.2145983
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1080/1331677X.2022.2145983?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Gersbach, Hans & Liu, Yulin & Tischhauser, Martin, 2021. "Versatile forward guidance: escaping or switching?," Journal of Economic Dynamics and Control, Elsevier, vol. 127(C).
    2. Dolado Juan & Pedrero Ramón María-Dolores & Ruge-Murcia Francisco J., 2004. "Nonlinear Monetary Policy Rules: Some New Evidence for the U.S," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 8(3), pages 1-34, September.
    3. Greg Kaplan & Benjamin Moll & Giovanni L. Violante, 2018. "Monetary Policy According to HANK," American Economic Review, American Economic Association, vol. 108(3), pages 697-743, March.
    4. Richard Clarida & Jordi Galí & Mark Gertler, 2000. "Monetary Policy Rules and Macroeconomic Stability: Evidence and Some Theory," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 115(1), pages 147-180.
    5. Bomfim, Antulio N & Rudebusch, Glenn D, 2000. "Opportunistic and Deliberate Disinflation under Imperfect Credibility," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 32(4), pages 707-721, November.
    6. Coletti, Donald & Lalonde, René & Masson, Paul & Muir, Dirk & Snudden, Stephen, 2021. "Commodities and monetary policy: Implications for inflation and price level targeting," Journal of Policy Modeling, Elsevier, vol. 43(5), pages 982-999.
    7. Chakrabarty, Himadri Shekhar & Roy, Rudra Prosad, 2021. "Pandemic uncertainties and fiscal procyclicality: A dynamic non-linear approach," International Review of Economics & Finance, Elsevier, vol. 72(C), pages 664-671.
    8. Thomas A. Lubik & Frank Schorfheide, 2004. "Testing for Indeterminacy: An Application to U.S. Monetary Policy," American Economic Review, American Economic Association, vol. 94(1), pages 190-217, March.
    9. Olivei, Giovanni & Tenreyro, Silvana, 2010. "Wage-setting patterns and monetary policy: International evidence," Journal of Monetary Economics, Elsevier, vol. 57(7), pages 785-802, October.
    10. Di Bartolomeo, Giovanni & Di Pietro, Marco & Giannini, Bianca, 2016. "Optimal monetary policy in a New Keynesian model with heterogeneous expectations," Journal of Economic Dynamics and Control, Elsevier, vol. 73(C), pages 373-387.
    11. Cole, Stephen J., 2018. "The effectiveness of central bank forward guidance under inflation and price-level targeting," Journal of Macroeconomics, Elsevier, vol. 55(C), pages 146-161.
    12. Aksoy, Yunus & Orphanides, Athanasios & Small, David & Wieland, Volker & Wilcox, David, 2006. "A quantitative exploration of the opportunistic approach to disinflation," Journal of Monetary Economics, Elsevier, vol. 53(8), pages 1877-1893, November.
    13. Andrew T. Foerster, 2016. "Monetary Policy Regime Switches And Macroeconomic Dynamics," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57(1), pages 211-230, February.
    14. Cole, Stephen J., 2020. "The influence of learning and price-level targeting on central bank forward guidance," Journal of Macroeconomics, Elsevier, vol. 65(C).
    15. Guender, Alfred V. & Oh, Do Yoon, 2006. "Price stability through price-level targeting or inflation targeting? A tale of two experiments," Journal of Economics and Business, Elsevier, vol. 58(5-6), pages 373-391.
    16. Edward Nelson, 2000. "UK monetary policy 1972-97: a guide using Taylor rules," Bank of England working papers 120, Bank of England.
    17. Christopher A. Sims & Tao Zha, 2006. "Were There Regime Switches in U.S. Monetary Policy?," American Economic Review, American Economic Association, vol. 96(1), pages 54-81, March.
    18. Jeffrey R. Campbell & Charles L. Evans & Jonas D.M. Fisher & Alejandro Justiniano, 2012. "Macroeconomic Effects of Federal Reserve Forward Guidance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(1 (Spring), pages 1-80.
    19. Andrade, Philippe & Ferroni, Filippo, 2021. "Delphic and odyssean monetary policy shocks: Evidence from the euro area," Journal of Monetary Economics, Elsevier, vol. 117(C), pages 816-832.
    20. Ehrmann, Michael & Gaballo, Gaetano & Hoffmann, Peter & Strasser, Georg, 2019. "Can more public information raise uncertainty? The international evidence on forward guidance," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 93-112.
    21. Areosa, Waldyr Dutra & Areosa, Marta B.M., 2016. "The inequality channel of monetary transmission," Journal of Macroeconomics, Elsevier, vol. 48(C), pages 214-230.
    22. Ippei Fujiwara & Yuichiro Waki, 2022. "The Delphic forward guidance puzzle in New Keynesian models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 46, pages 280-301, October.
    23. Cukierman Alex & Muscatelli Anton, 2008. "Nonlinear Taylor Rules and Asymmetric Preferences in Central Banking: Evidence from the United Kingdom and the United States," The B.E. Journal of Macroeconomics, De Gruyter, vol. 8(1), pages 1-31, February.
    24. Michael Woodford, 2005. "Central bank communication and policy effectiveness," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 399-474.
    25. Stefano Eusepi & Bruce Preston, 2010. "Central Bank Communication and Expectations Stabilization," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 235-271, July.
    26. Ippei Fujiwara & Yuichiro Waki, 2022. "The Delphic forward guidance puzzle in New Keynesian models," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 46, pages 280-301, October.
    27. Luisa F. Acuña-Roa & Julián A. Parra-Polania, 2016. "Price-level targeting versus inflation targeting in a new Keynesian model with inflation persistence," Journal of Applied Economics, Universidad del CEMA, vol. 19, pages 249-270, November.
    28. Goy, Gavin & Hommes, Cars & Mavromatis, Kostas, 2022. "Forward guidance and the role of central bank credibility under heterogeneous beliefs," Journal of Economic Behavior & Organization, Elsevier, vol. 200(C), pages 1240-1274.
    29. Ralph S.J. Koijen & Jules H. van Binsbergen & Juan F. Rubio-Ramírez & Jesus Fernandez-Villaverde, 2008. "Likelihood Estimation of DSGE Models with Epstein-Zin Preferences," 2008 Meeting Papers 1099, Society for Economic Dynamics.
    30. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
    31. Massaro, Domenico, 2013. "Heterogeneous expectations in monetary DSGE models," Journal of Economic Dynamics and Control, Elsevier, vol. 37(3), pages 680-692.
    32. Temitope Leshoro & Umakrishnan Kollamparambil, 2016. "Inflation Or Output Targeting? Monetary Policy Appropriateness In South Africa," PSL Quarterly Review, Economia civile, vol. 69(276), pages 77-104.
    33. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, vol. 12(3), pages 383-398, September.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. repec:hal:wpspec:info:hdl:2441/f4rshpf3v1umfa09lat09b1bg is not listed on IDEAS
    2. repec:spo:wpecon:info:hdl:2441/f4rshpf3v1umfa09lat09b1bg is not listed on IDEAS
    3. repec:hal:spmain:info:hdl:2441/f4rshpf3v1umfa09lat09b1bg is not listed on IDEAS
    4. repec:spo:wpmain:info:hdl:2441/f4rshpf3v1umfa09lat09b1bg is not listed on IDEAS
    5. Jean Boivin & Marc P. Giannoni, 2006. "Has Monetary Policy Become More Effective?," The Review of Economics and Statistics, MIT Press, vol. 88(3), pages 445-462, August.
    6. Haderer, Michaela, 2022. "An Estimated DSGE Model of the Euro Area with Expectations about the Timing and Nature of Liftoff from the Lower Bound," Working Papers 2022-05, University of Sydney, School of Economics.
    7. Beqiraj Elton & Di Bartolomeo Giovanni & Serpieri Carolina, 2017. "Bounded-rationality and heterogeneous agents: Long or short forecasters?," wp.comunite 00132, Department of Communication, University of Teramo.
    8. Hauzenberger, Niko & Pfarrhofer, Michael & Stelzer, Anna, 2021. "On the effectiveness of the European Central Bank’s conventional and unconventional policies under uncertainty," Journal of Economic Behavior & Organization, Elsevier, vol. 191(C), pages 822-845.
    9. Jesús Fernández-Villaverde, 2010. "The econometrics of DSGE models," SERIEs: Journal of the Spanish Economic Association, Springer;Spanish Economic Association, vol. 1(1), pages 3-49, March.
    10. Florin O. Bilbiie & Roland Straub, 2013. "Asset Market Participation, Monetary Policy Rules, and the Great Inflation," The Review of Economics and Statistics, MIT Press, vol. 95(2), pages 377-392, May.
    11. Dennis Wesselbaum, 2022. "Cheap Talk in a New Keynesian Model," Journal of Quantitative Economics, Springer;The Indian Econometric Society (TIES), vol. 20(3), pages 661-691, September.
    12. Elton Beqiraj & Giovanni Di Bartolomeo & Marco Di Pietro & Carolina Serpieri, 2020. "Bounded rationality and heterogeneous expectations: Euler versus anticipated-utility approach," Journal of Economics, Springer, vol. 130(3), pages 249-273, August.
    13. Qureshi, Irfan, 2018. "Money Aggregates and Determinacy : A Reinterpretation of Monetary Policy During the Great Inflation," The Warwick Economics Research Paper Series (TWERPS) 1156, University of Warwick, Department of Economics.
    14. Alice Albonico & Guido Ascari & Qazi Haque, 2024. "The (Ir)Relevance of Rule‐of‐Thumb Consumers for U.S. Business Cycle Fluctuations," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 56(4), pages 769-804, June.
    15. Ilabaca, Francisco & Milani, Fabio, 2021. "Heterogeneous expectations, indeterminacy, and postwar US business cycles," Journal of Macroeconomics, Elsevier, vol. 68(C).
    16. Aymeric Ortmans, 2020. "Evolving Monetary Policy in the Aftermath of the Great Recession," Documents de recherche 20-01, Centre d'Études des Politiques Économiques (EPEE), Université d'Evry Val d'Essonne.
    17. Paul Hubert, 2010. "Monetary policy, imperfect information and the expectations channel [Politique monétaire,information imparfaite et canal des anticipations]," SciencePo Working papers Main tel-04095385, HAL.
    18. Aruoba, S. Borağan & Bocola, Luigi & Schorfheide, Frank, 2017. "Assessing DSGE model nonlinearities," Journal of Economic Dynamics and Control, Elsevier, vol. 83(C), pages 34-54.
    19. Naraidoo, Ruthira & Paya, Ivan, 2012. "Forecasting monetary policy rules in South Africa," International Journal of Forecasting, Elsevier, vol. 28(2), pages 446-455.
    20. Efrem Castelnuovo & Paolo Surico, 2010. "Monetary Policy, Inflation Expectations and The Price Puzzle," Economic Journal, Royal Economic Society, vol. 120(549), pages 1262-1283, December.
    21. Andrew Foerster & Juan F. Rubio‐Ramírez & Daniel F. Waggoner & Tao Zha, 2016. "Perturbation methods for Markov‐switching dynamic stochastic general equilibrium models," Quantitative Economics, Econometric Society, vol. 7(2), pages 637-669, July.
    22. Paul Castillo & Carlos Montoro & Vicente Tuesta, 2005. "Inflation Premium and Oil Price Volatility," Working Papers Central Bank of Chile 350, Central Bank of Chile.
    23. Laura Coroneo & Valentina Corradi & Paulo Santos Monteiro, 2018. "Testing for optimal monetary policy via moment inequalities," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 33(6), pages 780-796, September.
    24. Zheng Liu & Daniel F. Waggoner & Tao Zha, 2009. "Sources of the Great Moderation: shocks, frictions, or monetary policy?," FRB Atlanta Working Paper 2009-03, Federal Reserve Bank of Atlanta.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:taf:reroxx:v:36:y:2023:i:2:p:2145983. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Chris Longhurst (email available below). General contact details of provider: http://www.tandfonline.com/rero .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.