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Full-Text Articles in Social and Behavioral Sciences
(Wp 2016-06) The Effectiveness Of Central Bank Forward Guidance Under Inflation And Price-Level Targeting, Stephen J. Cole
(Wp 2016-06) The Effectiveness Of Central Bank Forward Guidance Under Inflation And Price-Level Targeting, Stephen J. Cole
Economics Working Papers
This paper examines the effectiveness of central bank forward guidance under inflation and price-level targeting monetary policies. The results show that the attenuation of the effects of forward guidance can be solved if a central bank switches from inflation targeting to price-level targeting. Output and inflation respond more favorably to forward guidance with price-level targeting than inflation targeting. A monetary policy rule that aggressively reacts to inflation and includes interest rate inertia narrows the performance gap between the two policy regimes. However, forward guidance with price-level targeting is still preferred to forward guidance with inflation targeting after performing multiple robustness …
(Wp 2016-02) The Limits Of Central Bank Forward Guidance Under Learning, Stephen J. Cole
(Wp 2016-02) The Limits Of Central Bank Forward Guidance Under Learning, Stephen J. Cole
Economics Working Papers
Central bank forward guidance emerged as a pertinent tool for monetary policymakers since the Great Recession. Nevertheless, the effects of forward guidance remain unclear. This paper investigates the effectiveness of forward guidance while relaxing two standard macroeconomic assumptions: rational expectations and frictionless financial markets. Agents forecast future macroeconomic variables via either the rational expectations hypothesis or a more plausible theory of expectations formation called adaptive learning. A standard Dynamic Stochastic General Equilibrium (DSGE) model is extended to include the financial accelerator mechanism. The results show that the addition of financial frictions amplifies the differences between rational expectations and adaptive learning …