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FORWARD GUIDANCE AND THE STATE OF THE ECONOMY
Author(s) -
Keen Benjamin D.,
Richter Alexander W.,
Throckmorton Nathaniel A.
Publication year - 2017
Publication title -
economic inquiry
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.823
H-Index - 72
eISSN - 1465-7295
pISSN - 0095-2583
DOI - 10.1111/ecin.12466
Subject(s) - economics , zero lower bound , monetary policy , forward guidance , shock (circulatory) , interest rate , state (computer science) , macroeconomics , monetary economics , keynesian economics , econometrics , inflation targeting , credit channel , medicine , algorithm , computer science
This paper analyzes forward guidance in a nonlinear model with a zero lower bound (ZLB) on the nominal interest rate. Forward guidance is modeled with news shocks to the monetary policy rule, which capture innovations in expectations from central bank communication about future policy rates. Whereas most studies use quasi‐linear models that disregard the expectational effects of hitting the ZLB, we show how the effectiveness of forward guidance nonlinearly depends on the state of the economy, the speed of the recovery, the degree of uncertainty, the policy shock size, and the forward guidance horizon when households account for the ZLB. ( JEL E43, E58, E61)