Document Type

Article

Publication Date

9-2020

Publisher

Elsevier

Source Publication

Journal of Macroeconomics

Source ISSN

0164-0704

Abstract

This paper examines how the effectiveness of central bank forward guidance depends on two key channels: the expectations formation process and the monetary policy regime. The results show that rational expectations relative to an adaptive learning rule amplifies the positive benefits a price-level targeting central bank creates for forward guidance. Specifically, forward guidance generates greater amounts of output and inflation under a price-level than inflation targeting monetary policy regime, but rational expectations overstates these positive benefits compared to adaptive learning. The different responses of expectations between rational expectations and adaptive learning to forward guidance are driving this performance gap. Thus, policymakers should consider how expectations are modeled if forward guidance and price-level targeting are implemented in an economy.

Comments

Accepted version. Journal of Macroeconomics, Vol. 65 (September 2020): 103213. DOI. © 2020 Elsevier. Used with permission.

Available for download on Friday, September 01, 2023

Included in

Economics Commons

Share

COinS