Learning and the Effectiveness of Central Bank Forward Guidance

Abstract

Abstract This paper examines the link between expectations formation and the effectiveness of central bank forward guidance. A standard New Keynesian model is extended to include forward guidance shocks in the monetary policy rule. Agents form expectations about future macro‐economic variables via either the standard rational expectations hypothesis or an adaptive learning model. The results show that the assumption of rational expectations overstates the effects of forward guidance relative to adaptive learning during an economic crisis. Thus, if monetary policy is based on a model with rational expectations, the results of forward guidance could be potentially misleading.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 29 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.