Learning and the Effectiveness of Central Bank Forward Guidance

Authors

Stephen J. Cole, Marquette UniversityFollow

Document Type

Article

Publication Date

2-2021

Publisher

Wiley

Source Publication

Journal of Money, Credit, and Banking

Source ISSN

0022-2879

Abstract

This paper examines the link between expectations formation and the effectiveness of central bank forward guidance. A standard New Keynesian model is extended to include forward guidance shocks in the monetary policy rule. Agents form expectations about future macro-economic variables via either the standard rational expectations hypothesis or an adaptive learning model. The results show that the assumption of rational expectations overstates the effects of forward guidance relative to adaptive learning during an economic crisis. Thus, if monetary policy is based on a model with rational expectations, the results of forward guidance could be potentially misleading.

Comments

Accepted version. Journal of Money, Credit, and Banking, Vol. 53, No. 1 (February 2021): 157-200. DOI. © 2021 Wiley. Used with permission.

Recommended Citation

Cole, Stephen J., "Learning and the Effectiveness of Central Bank Forward Guidance" (2021). Economics Faculty Research and Publications. 637.
https://epublications.marquette.edu/econ_fac/637