Stabilization and commitment: forward guidance in economies with rational expectations

Andrew Hughes Hallett, Nicola Acocella*

*Corresponding author for this work

    Research output: Contribution to journalArticlepeer-review

    1 Citation (Scopus)

    Abstract

    We construct a theory of forward guidance in economic policy making in order to provide a framework for explaining the role and strategic advantages of including forward guidance as an explicit part of policy design. We do this by setting up a general policy problem in which forward guidance plays a role, and then examine the consequences for performance when that guidance is withdrawn. We show that forward guidance provides enhanced controllability and stabilizability—especially where such properties may not otherwise be available. As a by-product, we find that forward guidance limits the scope and incentives for time-inconsistent behavior in an economy whose policy goals are ultimately reachable. It also adds to the credibility of a set of policies.

    Original languageEnglish
    Pages (from-to)122-134
    Number of pages13
    JournalMacroeconomic Dynamics
    Volume22
    Issue number1
    Early online date5 Apr 2016
    DOIs
    Publication statusPublished - Jan 2018

    Keywords

    • Managing expectations
    • Stabilizability
    • Dynamic controllability
    • Time consistency

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