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Date
2018-01Type
- Working Paper
ETH Bibliography
yes
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Abstract
We examine how forward guidance should be designed when an economy faces negative natural real interest-rate shocks and subsequent supply shocks. Besides a standard approach for forward guidance, we introduce two flexible designs: escaping and switching. With escaping forward guidance, the central banker commits to low interest rates in the presence of negative natural real interest-rate shocks, contingent on a self-chosen inflation rate threshold. With switching forward guidance, the central banker can switch from interest-rate forecasts to inflation forecasts any time in order to stabilize supply shocks. We show that for small and large natural real interest-rate shocks, escaping forward guidance is preferable to any of the other approaches, while switching forward guidance is optimal for intermediate natural real interest-rate shocks. Furthermore, with the polynomial chaos expansion method, we show that our findings are globally robust to parameter uncertainty. In addition, using Sobol' Indices, we identify the structural parameters with the greatest effect on the results. Show more
Publication status
publishedJournal / series
CEPR Discussion PapersPages / Article No.
Publisher
Centre for Economic Policy ResearchSubject
Central banks; Forward guidance; Global robustness; Poynomial chaos expansion; Sobol' indices; Transparency; Zero lower boundOrganisational unit
03729 - Gersbach, Hans / Gersbach, Hans
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ETH Bibliography
yes
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