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Fiscal Forward Guidance: A Case for Selective Transparency

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  • Ippei Fujiwara
  • Yuichiro Waki

Abstract

Should the fiscal authority use forward guidance to reduce future policy uncertainty perceived by private agents? Using dynamic stochastic general equilibrium models, we examine the welfare effects of announcing future fiscal policy shocks. Analytical as well as numerical experiments show that selective transparency is desirable?announcing future fiscal policy shocks that are distortionary can be detrimental to ex ante social welfare, whereas announcing nondistortionary shocks generally improves welfare. Sizable welfare gains are found with constructive ambiguity regarding the timing of a consumption tax increase in the fiscal consolidation scenario in Japan recommended by Hansen and Imrohoroglu (2016). However, being secretive about distortionary tax shocks is time inconsistent, and welfare loss from communication may be unavoidable without commitment.

Suggested Citation

  • Ippei Fujiwara & Yuichiro Waki, 2017. "Fiscal Forward Guidance: A Case for Selective Transparency," Globalization Institute Working Papers 318, Federal Reserve Bank of Dallas.
    • Handle: RePEc:fip:feddgw:318
    DOI: 10.24149/gwp318
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    Cited by:

    1. Leonardo Melosi & Francesco Zanetti, 2022. "The Signaling Effects of Fiscal Announcements," Working Paper Series WP 2022-38, Federal Reserve Bank of Chicago.
    2. Bassetto, Marco, 2019. "Forward guidance: Communication, commitment, or both?," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 69-86.
    3. Juan Camilo Galvis-Ciro & Juan Camilo Anzoátegui-Zapata & Cristina Isabel Ramos-Barroso, 2022. "The Effect of Communication and Credibility on Fiscal Disagreement: Empirical Evidence from Colombia," Journal of Business Cycle Research, Springer;Centre for International Research on Economic Tendency Surveys (CIRET), vol. 18(3), pages 215-238, November.
    4. Tsuruga, Takayuki & Wake, Shota, 2019. "Money-financed fiscal stimulus: The effects of implementation lag," Journal of Economic Dynamics and Control, Elsevier, vol. 104(C), pages 132-151.
    5. 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.
    6. Melosi, Leonardo & Morita, Hiroshi & Rogantini Picco, Anna & Zanetti, Francesco, 2024. "The Signaling Effects of Fiscal Announcements," The Warwick Economics Research Paper Series (TWERPS) 1512, University of Warwick, Department of Economics.
    7. Leonardo Melosi & Francesco Zanetti, 2022. "The Signaling Effects of Fiscal Announcements," Working Paper Series WP 2022-38, Federal Reserve Bank of Chicago.
    8. Nicolas End, 2020. "Rousseau's social contract or Machiavelli's virtue? A measure of fiscal credibility," Working Papers halshs-03078704, HAL.
    9. Claudio Columbano, 2022. "Measuring fiscal guidance transparency," Public Sector Economics, Institute of Public Finance, vol. 46(2), pages 261-296.
    10. 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.
    11. End, Nicolas, 2023. "Big Brother is also being watched: Measuring fiscal credibility," Journal of Macroeconomics, Elsevier, vol. 77(C).

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    More about this item

    JEL classification:

    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E62 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Fiscal Policy; Modern Monetary Theory
    • H20 - Public Economics - - Taxation, Subsidies, and Revenue - - - General

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