Forward Guidance without Common Knowledge

Angeletos, George-Marios; Chen, Lian

doi:10.1257/aer.20161996

Cited by 268 publications

(164 citation statements)

References 44 publications

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“…Our work also shows that the empirical impact of purely Odyssean shocks on output and prices is not excessively strong. This is consistent with recent models in which the impact of forward guidance is mitigated compared with its impact in the basic New Keynesian setup due to incomplete markets (McKay, Nakamura and Steinsson 2016), imperfect information and higher-order beliefs (Angeletos and Lian 2018), bounded rationality (Gabaix 2016), or bounded rationality combined with incomplete markets (Farhi and Werning forthcoming).…”

Section: Related Literaturesupporting

confidence: 89%

Delphic and Odyssean Monetary Policy Shocks: Evidence from the Euro Area

Andrade

Ferroni

2019

Federal Reserve Bank of Boston Research Department Working Papers

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What drives the strong reaction of financial markets to central bank communication on the days of policy decisions? We highlight the role of two factors that we identify from highfrequency monetary surprises: news on future macroeconomic conditions (Delphic shocks) and news on future monetary policy shocks (Odyssean shocks). These two shocks move the yield curve in the same direction but have opposite effects on financial conditions and macroeconomic expectations. A drop in future interest rates that is associated with a negative Delphic (Odyssean) shock is perceived as being contractionary (expansionary). These offsetting effects can explain why central bank communication leads to a strong reaction of the yield curve together with a weak reaction by inflation expectations or stock prices. The two shocks also have different impacts on macroeconomic outcomes, such that central bankers cannot infer the degree of stimulus they provide by looking at the mere reaction of the yield curve. However, changes in their communication policy can influence the way markets predominantly understand communication about future interest rates. JEL Classifications: E52, E32, C10

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Section: Related Literaturesupporting

confidence: 89%

Delphic and Odyssean Monetary Policy Shocks: Evidence from the Euro Area

Andrade

Ferroni

2019

Federal Reserve Bank of Boston Research Department Working Papers

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“…The fact that households do not adjust their expectations to a larger extent to information beyond one year provides empirical support to theories that model decision makers with limited capacity to collect and process information: e.g., limited planning horizons (Woodford 2018), bounded rationality (Gabaix 2019), level-k thinking (Farhi and Werning 2019), lack of common information (Angeletos and Lian 2018). While the exact micro foundations differ across studies, they share the feature that agents with limited abilities react less to information in the far future relative to information about the current and immediate future and hence possibly resolve the forward guidance puzzle.…”

Section: Introductionmentioning

confidence: 89%

“…Empirically, forward guidance appears to be less powerful than standard theory predicts, a phenomenon commonly referred to as the forward guidance puzzle (Del Negro et al 2015, D'Acunto et al 2019a. Recent theoretical attempts (e.g., Woodford 2018, Gabaix 2019, Farhi and Werning 2019, Angeletos and Lian 2018 at resolving this puzzle that emerges in a representative agent New Keynesian model propose deviations from rational expectations as a possible resolution. While the exact microfoundations differ, they all attribute an important role to some form of limited cognition on the part of the decision maker.…”

Section: Treatmentsmentioning

confidence: 99%

Forward Guidance and Household Expectations

Coibion¹,

Georgarakos²,

Gorodnichenko³

et al. 2020

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We compare the causal effects of forward guidance communication about future interest rates on households' expectations of inflation, mortgage rates, and unemployment to the effects of communication about future inflation in a randomized controlled trial using more than 25,000 U.S. individuals in the Nielsen Homescan panel. We elicit individuals' expectations and then provide 22 different forms of information regarding past, current and/or future inflation and interest rates. Information treatments about current and next year's interest rates have a strong effect on household expectations but treatments beyond one year do not have any additional impact on forecasts. Exogenous variation in inflation expectations transmits into other expectations. The richness of our survey allows us to better understand how individuals form expectations about macroeconomic variables jointly and the non-response to long-run forward guidance is consistent with models in which agents have constrained capacity to collect and process information.JEL: E31, C83, D84

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“…As argued in Schorfheide (2013), one of the key challenges in developing empirically-realistic 1 Recent contributions include Gabaix (2018), Garcia-Schmidt and Woodford (2019) and Farhi and Werning (2018), and Angeletos and Lian (2018). For a broader discussion of behavioral macroeconomics, see De Grauwe (2012).…”

Section: Introductionmentioning

confidence: 99%

“…This reflects both the endogenous persistence generated by agents' learning about their value functions as well as the reduced degree of forward-looking behavior associated with short-term planning horizons. Because of this model's ability to generate slow moving trends, its "goodness of fit" measure is substantially better than that of behavioral macro models of Angeletos and Lian (2018) and Gabaix (2018). Surprisingly, the FH model fit is nearly as good as the fit of a NK model that incorporates exogenous and separate trends in output, inflation, and interest rates.…”

Section: Introductionmentioning

confidence: 99%

Short-term Planning, Monetary Policy, and Macroeconomic Persistence

Gust

Herbst

López‐Salido

2020

FEDS

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This paper uses aggregate data to estimate and evaluate a behavioral New Keynesian (NK) model in which households and firms plan over a finite horizon. The finite-horizon (FH) model outperforms rational expectations versions of the NK model commonly used in empirical applications as well as other behavioral NK models. The better fit of the FH model reflects that it can induce slow-moving trends in key endogenous variables which deliver substantial persistence in output and inflation dynamics. In the FH model, households and firms are forward-looking in thinking about events over their planning horizon but are backward looking regarding events beyond that point. This gives rise to persistence without resorting to additional features such as habit persistence and price contracts indexed to lagged inflation. The parameter estimates imply that the planning horizons of most households and firms are less than two years which considerably dampens the effects of expected future changes of monetary policy on the macroeconomy. JEL Classification: C11, E52, E70

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Forward Guidance without Common Knowledge

Cited by 268 publications

References 44 publications

Delphic and Odyssean Monetary Policy Shocks: Evidence from the Euro Area

Delphic and Odyssean Monetary Policy Shocks: Evidence from the Euro Area

Forward Guidance and Household Expectations

Short-term Planning, Monetary Policy, and Macroeconomic Persistence

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