Working Paper: CEPR ID: DP16020
Authors: Ippei Fujiwara; Yuichiro Waki
Abstract: When the central bank has information that can help the private sector better predict the future, should it communicate such information to the public? In purely forward-looking New Keynesian models, such Delphic forward guidance unambiguously reduces ex ante welfare by increasing the variability of inflation and the output gap. We call this phenomenon the Delphic forward guidance puzzle. In more elaborate models with endogenous state variables, a combination of Delphic forward guidance and preemptive policy actions may improve welfare. However, full information revelation is generally not optimal and what information needs to be revealed is highly model-dependent.
Keywords: news shock; optimal monetary policy; private information; bayesian persuasion; forward guidance; new keynesian models
JEL Codes: E30; E40; E50
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| delphic forward guidance (E66) | increased variability of inflation expectations (E31) |
| increased variability of inflation expectations (E31) | greater variability in inflation (E31) |
| greater variability in inflation (E31) | greater variability in the output gap (E39) |
| delphic forward guidance (E66) | reduced ex ante welfare (D69) |
| delphic forward guidance (E66) | misalignment of incentives between the central bank and price setters (E31) |
| lack of endogenous state variables in purely forward-looking models (E19) | welfare loss (D69) |
| preemptive monetary policy can mitigate future recessions (E63) | complex welfare implications of information revelation (D82) |
| type of shock and specific model parameters (C69) | sign of welfare effect of delphic forward guidance (H31) |