Stabilization and commitment : forward guidance in economies with rational expectations
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We construct a theory of forward guidance in economic policy making in order to provide a framework for explaining the role and strategic advantages of including forward guidance as an explicit part of policy design. We do this by setting up a general policy problem in which forward guidance plays a role, and then examine the consequences for performance when that guidance is withdrawn. We show that forward guidance provides enhanced controllability and stabilizability—especially where such properties may not otherwise be available. As a by-product, we find that forward guidance limits the scope and incentives for time-inconsistent behavior in an economy whose policy goals are ultimately reachable. It also adds to the credibility of a set of policies.
Hughes Hallett , A & Acocella , N 2016 , ' Stabilization and commitment : forward guidance in economies with rational expectations ' Macroeconomic Dynamics , vol First View . DOI: 10.1017/S136510051600002X
Copyright © Cambridge University Press 2016 This work is made available online in accordance with the publisher’s policies. This is the author created, accepted version manuscript following peer review and may differ slightly from the final published version. The final published version of this work is available at https://dx.doi.org/10.1017/S136510051600002X