Working Paper: CEPR ID: DP12650
Authors: Philippe Andrade; Gaetano Gaballo; Eric Mengus; Benoit Mojon
Abstract: Central banks' announcements that future rates are expected to remain low for some time could signal either a weak macroeconomic outlook - which is bad news - or a more accommodative policy stance - which is good news. We use the Survey of Professional Forecasters to show that, when the Fed gave date-based forward guidance between 2011Q3 and 2012Q4, these two interpretations coexisted despite a consensus that rates would stay low for long. We rationalize these facts in an otherwise standard New-Keynesian model where agents: (i) are uncertain about the length of the trap, (ii) have different priors on the commitment ability of the central bank, and (iii) perceive central bank announcements of expected rates as accurate. This heterogeneity of beliefs introduces a trade-off in forward guidance policy: leveraging on the optimism of those who believe the central bank can commit comes at the cost of inducing excess pessimism in non-believers. When pessimistic views prevail, forward guidance can even be detrimental.
Keywords: signaling channel; disagreement; optimal policy; zero lower bound; survey forecasts
JEL Codes: E31; E52; E65
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Forward guidance (Y20) | Economic expectations (D84) |
| Optimistic interpretations of forward guidance (E60) | Aggregate demand (E00) |
| Pessimistic interpretations of forward guidance (D84) | Aggregate demand (E00) |
| Pessimistic views dominate (F01) | Lower current aggregate demand (E19) |
| Divergence in interpretation of forward guidance (E60) | Different economic outcomes (P19) |
| Revisions in interest rate forecasts (E47) | Differing macroeconomic outlooks (E66) |