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Communication at the Zero Lower Bound: The Case for Forward Guidance

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  • Viktor Marinkov

Abstract

The zero lower bound (ZLB) acts as an informational curtain for adaptively learning agents as they cannot observe the path of the interest rate. In a canonical New Keynesian model with no policy change it is shown that this results in a disagreement between the Central Bank and the agents about the lift-off date from the ZLB. Consistent with data from the Swedish Riksbank, the agents expect an earlier lift-off than the Central Bank when the ZLB is binding. The disagreement coupled with the learning of the agents results in explosive dynamics. Forward guidance is shown to restore stability at the ZLB by pre­venting spurious expectational drift. The paper calls for a necessary increase in transparency and communication by the Central Bank when constrained by the ZLB. Although such communication is welfare improving, the gains are modest and no forward guidance puzzle is present.

Suggested Citation

  • Viktor Marinkov, 2020. "Communication at the Zero Lower Bound: The Case for Forward Guidance," Economics Series Working Papers 923, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:923
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    References listed on IDEAS

    as
    1. George W. Evans & Seppo Honkapohja, 2003. "Adaptive learning and monetary policy design," Proceedings, Federal Reserve Bank of Cleveland, pages 1045-1084.
    2. Bruce Preston, 2005. "Learning about Monetary Policy Rules when Long-Horizon Expectations Matter," International Journal of Central Banking, International Journal of Central Banking, vol. 1(2), September.
    3. George W. Evans, 2001. "Expectations in Macroeconomics. Adaptive versus Eductive Learning," Revue Économique, Programme National Persée, vol. 52(3), pages 573-582.
    4. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
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    More about this item

    Keywords

    Forward Guidance; Adaptive Learning; Central Bank Communication; Zero Lower Bound;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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