Forward Guidance Contracts

Arbeitspapier

We examine “Forward Guidance Contracts”, which make central bankers’ utility contingent on the precision of interest-rate forecasts for some time. Such Forward Guidance Contracts are a exible commitment device and can improve economic performance when the economy is stuck in a liquidity trap. Utilizing the New Keynesian Framework, we establish the properties of simple renewable Forward Guidance Contracts and characterize the contracts that the government wants to offer repeatedly. These contracts create favorable tradeoffs between the efficacy of forward guidance at the zero bound and the reduced exibility in reacting to future events, when the zero bound on nominal interest rates constrains the central banks’ choice. We discuss how Forward Guidance Contracts can be used when there is uncertainty about natural real interest-rate shocks, a situation which typically calls for moderate incentive intensity. Finally we explore alternative contractual environments.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 5375

Classification and Topics

• Classification: Wirtschaft ; Price Level; Inflation; Deflation ; Money and Interest Rates: Other ; Monetary Policy ; Central Banks and Their Policies
• Subject: forward guidance ; zero lower bound ; central banks ; incentive contracts ; transparency

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Gersbach, Hans ; Hahn, Volker ; Liu, Yulin
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2015

Further information

• Handle: http://hdl.handle.net/10419/110878
• Last update: 10.03.2025, 11:43 AM CET