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The Influence Of Learning And Price-Level Targeting On Central Bank Forward Guidance, Stephen J. Cole
The Influence Of Learning And Price-Level Targeting On Central Bank Forward Guidance, Stephen J. Cole
Economics Faculty Research and Publications
This paper examines how the effectiveness of central bank forward guidance depends on two key channels: the expectations formation process and the monetary policy regime. The results show that rational expectations relative to an adaptive learning rule amplifies the positive benefits a price-level targeting central bank creates for forward guidance. Specifically, forward guidance generates greater amounts of output and inflation under a price-level than inflation targeting monetary policy regime, but rational expectations overstates these positive benefits compared to adaptive learning. The different responses of expectations between rational expectations and adaptive learning to forward guidance are driving this performance gap. Thus, …