Versatile forward guidance: escaping or switching?
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Date
2021-06
Publication Type
Journal Article
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yes
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Abstract
We examine forward guidance when an economy faces negative natural real interest rates and subsequent supply shocks. We introduce two versatile designs: escaping and switching. In the former, the central bank escapes low interest-rate commitment when inflation reaches a self-chosen threshold. In the latter, the central bank can switch from interest-rate forecasts to inflation forecasts any time. Central bankers are scrupulous and face intrinsic (or extrinsic) costs when they deviate from their policy announcements in the future. We show that switching forward guidance is preferable over escaping forward guidance if and only if negative real interest rate shocks are moderate. Furthermore, with the polynomial chaos expansion method and Sobol’ Indices, we identify the decisive parameters and show that our findings are globally robust to parameter uncertainty. © 2021 Elsevier B.V.
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published
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Journal / series
Volume
127
Pages / Article No.
104087
Publisher
Elsevier
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Subject
Forward guidance; Zero lower bound; Central banks; Transparency; Global robustness; Sobol’ indices; Polynomial chaos expansion
Organisational unit
03729 - Gersbach, Hans / Gersbach, Hans
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