Threshold-based forward guidance

Threshold-based forward guidance When the monetary policy rate is at the zero bound, “threshold-based forward guidance” (TBFG) is a state-contingent promise to delay liftoff from the zero bound until macroeconomic variables breach particular “thresholds”. We study TBFG within a stochastic version of the workhorse New Keynesian model. We show that TBFG can be used to provide temporary stimulus, while also limiting the time inconsistency of policy promises. Existence of a unique equilibrium requires the policymaker to specify how the thresholds should be interpreted, as well as their values. With an appropriate choice of thresholds, TBFG outperforms forward guidance based purely on calendar time and substantially reduces welfare losses compared to the optimal time-consistent policy. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Journal of Economic Dynamics and Control Elsevier

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Publisher
Elsevier
Copyright
Copyright © 2018 The Bank of England
ISSN
0165-1889
eISSN
1879-1743
D.O.I.
10.1016/j.jedc.2018.02.003
Publisher site
See Article on Publisher Site

Abstract

When the monetary policy rate is at the zero bound, “threshold-based forward guidance” (TBFG) is a state-contingent promise to delay liftoff from the zero bound until macroeconomic variables breach particular “thresholds”. We study TBFG within a stochastic version of the workhorse New Keynesian model. We show that TBFG can be used to provide temporary stimulus, while also limiting the time inconsistency of policy promises. Existence of a unique equilibrium requires the policymaker to specify how the thresholds should be interpreted, as well as their values. With an appropriate choice of thresholds, TBFG outperforms forward guidance based purely on calendar time and substantially reduces welfare losses compared to the optimal time-consistent policy.

Journal

Journal of Economic Dynamics and ControlElsevier

Published: May 1, 2018

References

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