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Forward Guidance and Heterogeneous Beliefs†

Forward Guidance and Heterogeneous Beliefs† AbstractCentral banks’ announcements that rates are expected to remain low could signal either a weak macroeconomic outlook, which would slow expenditures, or a more accommodative stance, which may stimulate economic activity. We use the Survey of Professional Forecasters to show that, when the Fed gave guidance between 2011:III and 2012:IV, these two interpretations coexisted despite a consensus on low expected rates. We rationalize these facts in a New-Keynesian model where heterogeneous beliefs introduce a trade-off in forward guidance policy: leveraging on the optimism of those who believe in monetary easing comes at the cost of inducing excess pessimism in non-believers. (JEL D83, E12, E43, E52, E58, E65) http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png American Economic Journal: Macroeconomics American Economic Association

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Publisher
American Economic Association
Copyright
Copyright © 2019 © American Economic Association
ISSN
1945-7715
DOI
10.1257/mac.20180141
Publisher site
See Article on Publisher Site

Abstract

AbstractCentral banks’ announcements that rates are expected to remain low could signal either a weak macroeconomic outlook, which would slow expenditures, or a more accommodative stance, which may stimulate economic activity. We use the Survey of Professional Forecasters to show that, when the Fed gave guidance between 2011:III and 2012:IV, these two interpretations coexisted despite a consensus on low expected rates. We rationalize these facts in a New-Keynesian model where heterogeneous beliefs introduce a trade-off in forward guidance policy: leveraging on the optimism of those who believe in monetary easing comes at the cost of inducing excess pessimism in non-believers. (JEL D83, E12, E43, E52, E58, E65)

Journal

American Economic Journal: MacroeconomicsAmerican Economic Association

Published: Jul 1, 2019

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