Attenuating the forward guidance puzzle: Implications for optimal monetary policy

Arbeitspapier

We examine the implications of less powerful forward guidance for optimal policy using a sticky-price model with an effective lower bound (ELB) on nominal interest rates as well as a discounted Euler equation and Phillips curve. When the private-sector agents discount future economic conditions more in making their decisions today, an announced cut in future interest rates becomes less effective in stimulating current economic activity. While the implication of such discounting for optimal policy depends on its degree, we find that, under a wide range of plausible degrees of discounting, it is optimal for the central bank to compensate for the reduced effect of a future rate cut by keeping the policy rate at the ELB for longer.

Object Details

• ISBN: 978-92-899-3482-4
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 2220

Classification and Topics

• Classification: Wirtschaft ; Monetary Policy ; Central Banks and Their Policies ; Policy Objectives; Policy Designs and Consistency; Policy Coordination
• Subject: Forward Guidance ; Optimal Policy ; Discounted Euler Equation ; Discounted Phillips Curve ; Effective Lower Bound

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Nakata, Taisuke ; Ogaki, Ryota ; Schmidt, Sebastian ; Yoo, Paul
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2019

Further information

• DOI: doi:10.2866/61973
• Handle: http://hdl.handle.net/10419/208254
• Last update: 10.03.2025, 11:45 AM CET