òòò½Íø

This website uses cookies.

By clicking the "Accept" button or continuing to browse our site, you agree to first-party and session-only cookies being stored on your device to enhance site navigation and analyze site performance and traffic. For more information on our use of cookies, please see our Privacy Policy.

  1. Home
  2. òòò½Íø
  3. òòò½Íø Review
  4. October 2016
  5. The Power of Forward Guidance Revisited

òòò½Íø Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

The Power of Forward Guidance Revisited

  • Alisdair McKay
  • Emi Nakamura
  • Jón Steinsson
òòò½Íø Review
vol. 106, no. 10, October 2016
(pp. 3133–58)
Download Full Text PDF

Abstract

In recent years, central banks have increasingly turned to forward guidance as a central tool of monetary policy. Standard monetary models imply that far future forward guidance has huge effects on current outcomes, and these effects grow with the horizon of the forward guidance. We present a model in which the power of forward guidance is highly sensitive to the assumption of complete markets. When agents face uninsurable income risk and borrowing constraints, a precautionary savings effect tempers their responses to changes in future interest rates. As a consequence, forward guidance has substantially less power to stimulate the economy.

Citation

McKay, Alisdair, Emi Nakamura, and Jón Steinsson. 2016. "The Power of Forward Guidance Revisited." òòò½Íø Review 106 (10): 3133–58. DOI: 10.1257/aer.20150063

Additional Materials

JEL Classification

  • E21 Macroeconomics: Consumption; Saving; Wealth
  • E40 Money and Interest Rates: General
  • E50 Monetary Policy, Central Banking, and the Supply of Money and Credit: General