Forward Guidance without Common Knowledge | Zendy

George-Marios Angeletos | Zendy; Chen Lian | Zendy

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Forward Guidance without Common Knowledge

Author(s) -

George-Marios Angeletos,

Chen Lian

Publication year - 2018

Publication title -

american economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 16.936

H-Index - 297

eISSN - 1944-7981

pISSN - 0002-8282

DOI - 10.1257/aer.20161996

Subject(s) - economics , fragility , rest (music) , general equilibrium theory , aggregate (composite) , class (philosophy) , financial fragility , new keynesian economics , common knowledge (logic) , microeconomics , econometrics , mathematical economics , keynesian economics , monetary policy , computer science , medicine , chemistry , materials science , financial crisis , artificial intelligence , cardiology , composite material , programming language , multimodal logic , epistemic modal logic , description logic

How does the economy respond to news about future policies or future fundamentals? Standard practice assumes that agents have common knowledge of such news and face no uncertainty about how others will respond. Relaxing this assumption attenuates the general-equilibrium effects of news and rationalizes a form of myopia at the aggregate level. We establish these insights within a class of games which nests, but is not limited to, the New Keynesian model. Our results help resolve the forward-guidance puzzle, offer a rationale for the front-loading of fiscal stimuli, and illustrate more broadly the fragility of predictions that rest on long series of forward-looking feedback loops.

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