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Stabilization and commitment: forward guidance in economies with rational expectations

Research output: Contribution to journalArticle

Author(s)

Andrew Hughes Hallett, Nicola Acocella

School/Research organisations

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problem in which forward guidance plays a role, and then examine the consequences for performance when that guidance is withdrawn.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.

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Details

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

    Research areas

  • Managing expectations , Stabilizability, Dynamic controllability, Time consistency

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