On Forward Guidance
Date Issued
2015
Date
2015
Author(s)
Chen, Yan-Syue
Abstract
Since the onset of the global finance crisis in 2007, many countries have used various expansionary monetary policies to stimulate their economies. The management of expectations is the key to successful monetary policy at all times, and as the practice of communicating the future path of monetary policy instruments, forward guidance is aimed at influencing the public’s expectations. This essay begins with discussing the characteristics and the rationales of forward guidance. Then, through describing the extraordinary times of and motivation for using forward guidance as a monetary tool of the FRB, BOE, ECB, and BOJ at the zero lower bound, we analyze the applications of forward guidance in practice. Finally, we discuss the relating issues of its policy effects. We find that the management of private-sector expectations by the central bank can be expected to mitigate the distortions of the zero bound. Moreover, the long-term interest rate is the average of the current and expected future short-term interest rates and through a credibly optimal commitment policy, the central bank may influence expected short-term interest rates, successfully shifting the long-term bond yields and hence current macroeconomic aggregate demand such as investment, consumption and output. Therefore, we conclude that the recent increased reliance on forward guidance has helped clarify policy intentions and bring public expectations into closer alignment with central bank’s thinking in highly unusual economic circumstances.
Subjects
management of expectations
forward guidance
zero lower bound
extraordinary times
optimal commitment policies
Type
thesis
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