Credible Forward Guidance
Year: 2019
Type: article
Abstract: How can the central bank credibly implement a ``lower-for-longer'' strategy? To answer this question, we analyze a series of optimal sustainable policy problems---indexed by the duration of reputational loss---in a sticky-price model with an effective lower bound (ELB) constraint on nominal interest rates. We find that, even without an explicit commitment technology, the central bank can still credibly keep the policy rate at the ELB for an extended period---though not as extended as under the optimal commitment policy---and meaningfully mitigate the adverse effects of the ELB constraint on economic activity.
Authors: Taisuke Nakata, Takeki Sunakawa
Language: English
Domain: Social Sciences
Open Access status: diamond
OpenAlex ID: W2945637872