Arbeitspapier

The forward guidance trap

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.

Language
Englisch

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

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

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

Handle
Last update
10.03.2025, 11:43 AM CET

Data provider

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Object type

  • Arbeitspapier

Associated

  • Orphanides, Athanasios
  • Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS)

Time of origin

  • 2023

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