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Learning and the Effectiveness of Central Bank Forward Guidance
Author(s) -
COLE STEPHEN J.
Publication year - 2021
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12696
Subject(s) - rational expectations , economics , forward guidance , new keynesian economics , monetary policy , adaptive learning , macro , central bank , adaptive expectations , macroeconomics , inflation targeting , computer science , credit channel , artificial intelligence , programming language
This paper examines the link between expectations formation and the effectiveness of central bank forward guidance. A standard New Keynesian model is extended to include forward guidance shocks in the monetary policy rule. Agents form expectations about future macro‐economic variables via either the standard rational expectations hypothesis or an adaptive learning model. The results show that the assumption of rational expectations overstates the effects of forward guidance relative to adaptive learning during an economic crisis. Thus, if monetary policy is based on a model with rational expectations, the results of forward guidance could be potentially misleading.