The Power of Forward Guidance and the Fiscal Theory of the Price Level
McClung, Nigel (01.12.2021)
JulkaisusarjaInternational Journal of Central Banking
Julkaisun pysyvä osoite onhttps://urn.fi/URN:NBN:fi:bof-202109131502
Standard models predict implausible responses to forward-guidance announcements when interest rates are pegged (the "forward-guidance puzzle"). This paper develops conditions for regime-switching models to exhibit a forward-guidance puzzle,and shows when the fiscal theory of the price level does-and does not-resolve the forward-guidance puzzle. Forward guidance has reasonable effects when real fiscal revenues are very unresponsive to government debt, but in some empirically relevant cases, inflation must ensure debt stability and forward-guidance puzzles are still there. Cyclical variation in deficits also affects the power of forward guidance.
Published also as BoF DP 21/2018.