Optimal Forward Guidance
- Bilbiie, Florin O. Department of Economics, University of Lausanne, Internef, Quartier Chamberonne, CH-1015, Lausanne, Switzerland and the Center for Economic and Policy Research (CEPR) (email: )
Published in:
- American Economic Journal: Macroeconomics. - American Economic Association. - 2019, vol. 11, no. 4, p. 310-345
English
Optimal forward guidance is the simple policy of keeping interest rates low for some optimally determined number of periods after the liquidity trap ends and moving to normal-times optimal policy thereafter. I solve for the optimal duration in closed form in a new Keynesian model and show that it is close to fully optimal Ramsey policy. The simple rule “announce a duration of half of the trap’s duration times the disruption” is a good approximation, including in a medium-scale dynamic stochastic general equilibrium (DSGE) model. By anchoring expectations of Delphic agents (who mistake commitment for bad news), the simple rule is also often welfare-preferable to Odyssean commitment. (JEL D84, E12, E43, E52, E56)
- Language
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- English
- Open access status
- green
- Identifiers
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- DOI 10.1257/mac.20170335
- ISSN 1945-7707
- Persistent URL
- https://sonar.ch/global/documents/149097
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