Document Type
Article
Publication Date
9-2020
Publisher
Federal Reserve Board
Source Publication
International Journal of Central Banking
Source ISSN
1815-4654
Abstract
This paper investigates the effectiveness of central bank forward guidance while relaxing two standard macroeconomic assumptions: rational expectations and frictionless financial markets. The results show that the addition of financial frictions amplifies the differences between rational expectations and adaptive learning to forward guidance. During a period of economic crisis, output under rational expectations displays more favorable responses to forward guidance than under adaptive learning. These differences are exacerbated when compared with a similar analysis without financial frictions. Thus, monetary policymakers should consider the way in which expectations and credit frictions are modeled when examining the effects of forward guidance.
Recommended Citation
Cole, Stephen J., "The Limits of Central Bank forward Guidance under Learning" (2020). Economics Faculty Research and Publications. 617.
https://epublications.marquette.edu/econ_fac/617
Comments
Published version. International Journal of Central Banking, Vol. 16, No. 4 (September 2020): 199-250. Publisher link. © 2020 Federal Reserve Board. Used with permission.