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State-Contingent Forward Guidance

Author

Listed:
  • Valentin Jouvanceau

    (Bank of Lithuania)

  • Julien Albertini

    (GATE, University of Lyon)

  • Stéphane Moyen

    (Deutsche Bundesbank)

Abstract

This paper proposes a new strategy for modeling and solving state-dependent forward guidance policies (SCFG). We study its transmission channels using a DSGE model with search and matching frictions in which agents account for the fact that the SCFG is an endogenous regime-switching system. A fully credible SCFG causes a boom in inflation and output but no rapid exit from the ZLB. Thus, the transmission of its effects is primarily through the realization of additional ZLB periods more than through changes in expectations. We next consider the implications of imperfect credibility. In this case of uncertainty, an SCFG is less impactful. Finally, using counterfactual experiments on the December 2012 FOMC statement, we find that it led to about 1.5 pp gain in unemployment and 0.5 pp in inflation.

Suggested Citation

  • Valentin Jouvanceau & Julien Albertini & Stéphane Moyen, 2022. "State-Contingent Forward Guidance," Bank of Lithuania Working Paper Series 100, Bank of Lithuania.
    • Handle: RePEc:lie:wpaper:100
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    References listed on IDEAS

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    More about this item

    Keywords

    New Keynesian model; Search and matching; ZLB; Forward guidance.;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • J60 - Labor and Demographic Economics - - Mobility, Unemployment, Vacancies, and Immigrant Workers - - - General

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