For best experience please turn on javascript and use a modern browser!

'Forward guidance and the role of central bank credibility under heterogeneous beliefs'

Detail Summary
Date 17 May 2016
Time 13:00 -14:00
Location
Roeterseilandcampus - gebouw E

Abstract

This paper studies the macroeconomic effects of central bank forward guidance when agents are boundedly rational and heterogeneous. In particular, we take a cashless New Keynesian model subject to an occasionally binding zero lower bound constraint on nominal interest rates and replace the representative agent with a more realistic population of boundedly rational agents. Private households can only form expectations for a finite horizon and use simple forecasting heuristics to forecast key macroeconomic variables of interest. Further, these agents switch endogenously between these heuristics according to a performance measure. Contrary, the central bank is assumed to use a bivariate VAR to form expectations, yet is unaware of the time-variation in the distribution of aggregate expectations. Besides the interest rate, the central bank has two additional policy tools at its disposal: it can publish its own forecasts (Delphic) and commit, though only imperfectly credible, to a future path of nominal interest rates (Odyssean). We find that that the combination of real-time learning and model misspecification of the central bank gives rise to policy mistakes that can result in periods of high inflation. Moreover, both Delphic and Odyssean forward guidance are useful tools in stabilizing the economy, although, when private households are backward-looking, the benefits of the latter are limited. Delphic forward guidance, on the other hand, significantly lowers the likelihood of deflationary spirals, once the economy is stuck in a liquidity trap.

Lunch will be provided. For more information please contact Myrna Hennequin (M.Hennequin@uva.nl).

Location

Seminar room E5.22

Roeterseilandcampus - gebouw E

Roetersstraat 11
1018 WB Amsterdam