The forward guidance trap

Arbeitspapier

This paper examines the policy experience of the Fed, ECB and BOJ during and after the Covid-19 pandemic and draws lessons for monetary policy strategy and its communication. All three central banks provided appropriate accommodation during the pandemic but two failed to unwind this accommodation in a timely manner. The Fed and ECB guided real interest rates to inappropriately negative levels as the economy recovered from the pandemic, fueling high inflation. The policy error can be traced to decisions regarding forward guidance on policy rates that delayed lift-off while the two central banks continued to expand their balance sheets. The Fed and the ECB fell into the forward guidance trap. This could have been avoided if policy were guided by a forwardlooking rule that properly adjusted the nominal interest rate with the evolution of the inflation outlook.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: IMFS Working Paper Series ; No. 190

Classification and Topics

• Classification: Wirtschaft ; Monetary Policy ; Central Banks and Their Policies ; Policy Objectives; Policy Designs and Consistency; Policy Coordination
• Subject: Monetary policy strategy ; forward guidance ; policy rules

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Orphanides, Athanasios
• Event: Veröffentlichung
• (who): Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS)
• (where): Frankfurt a. M.
• (when): 2023

Further information

• Handle: http://hdl.handle.net/10419/278756
• Last update: 10.03.2025, 11:43 AM CET