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STABILIZATION AND COMMITMENT: FORWARD GUIDANCE IN ECONOMIES WITH RATIONAL EXPECTATIONS

Published online by Cambridge University Press:  05 April 2016

Andrew Hughes Hallett  and
Nicola Acocella
Andrew Hughes Hallett
Affiliation:
George Mason University and University of St Andrews
Nicola Acocella*
Affiliation:
“Sapienza” University of Rome
*
Address correspondence to: Nicola Acocella, “Sapienza” University of Rome, Via Castro Laurenziano 9, 00161 Rome, Italy; e-mail: [email protected].
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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problem in which forward guidance plays a role, and then examine the consequences for performance when that guidance is withdrawn.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.

Keywords

Managing ExpectationsStabilizabilityDynamic ControllabilityTime Consistency
Type
Articles
Information
Macroeconomic Dynamics , Volume 22 , Special Issue 1: Current Macroeconomic Challenges , January 2018 , pp. 122 - 134
Copyright
Copyright © Cambridge University Press 2016 

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References

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