Forward Guidance Under the Cost Channel

Arbeitspapier

A common finding in the literature is that forward guidance cannot be credible under discretionary policy as long as the zero lower bound is an one-off event. However, this is not the case when recurring episodes of zero interest rates are possible. In this paper, we contribute to this new result and assess the sustainability of forward guidance under the cost channel. We find that forward guidance can be sustainable under the cost channel. However, we show that it is less credible compared to a standard New Keynesian model. Our results show that this finding also depends on the strength of the cost channel. Furthermore, provide evidence that ignoring the presence of a cost channel can be costly in terms of steady-state consumption.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: MAGKS Joint Discussion Paper Series in Economics ; No. 04-2020

Classification and Topics

• Classification: Wirtschaft ; General Aggregative Models: Keynes; Keynesian; Post-Keynesian ; Interest Rates: Determination, Term Structure, and Effects ; Monetary Policy ; Central Banks and Their Policies ; Policy Objectives; Policy Designs and Consistency; Policy Coordination
• Subject: Forward Guidance ; Sustainability ; Cost Channel ; Discretion

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Finck, David
• Event: Veröffentlichung
• (who): Philipps-University Marburg, School of Business and Economics
• (where): Marburg
• (when): 2020

Further information

• Handle: http://hdl.handle.net/10419/216644
• Last update: 10.03.2025, 11:44 AM CET