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FORWARD GUIDANCE CONTRACTS

Published online by Cambridge University Press:  13 July 2018

Hans Gersbach ,
Volker Hahn  and
Yulin Liu
Hans Gersbach*
Affiliation:
CER-ETH
Volker Hahn
Affiliation:
University of Konstanz
Yulin Liu
Affiliation:
CER-ETH
*
Address correspondence to: Hans Gersbach, CER-ETH, Center of Economic Research at ETH Zurich, 8092 Zurich, Switzerland; e-mail: [email protected].
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Abstract

We examine “Forward Guidance Contracts,” which penalize central bankers for choosing high interest rates. We integrate those contracts into the New Keynesian Framework and show that they can be used to overcome a liquidity trap. Moreover, although the government takes only a share of the social benefits into account when it has to decide whether to offer the contract, we demonstrate that for plausible parameter values the government will always find it desirable to offer the contract in a liquidity trap but not in normal times. Finally, we show that the optimal duration of such contracts is typically very short.

Keywords

Forward GuidanceZero Lower BoundCentral BanksIncentive ContractsTransparency
Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 8 , December 2019 , pp. 3386 - 3423
Copyright
Copyright © Cambridge University Press 2018 

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Footnotes

We would like to thank Aleksander Berentsen, Markus Epp, Michael Kumhof, Leonardo Melosi, Nassim Taleb, Martin Tischhauser, Oliko Vardishvili, Michael Woodford, and numerous conference participants for valuable comments on this paper. We are also grateful to the two anonymous referees for helpful suggestions and remarks.

References

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