The power of forward guidance and the fiscal theory of the price level
McClung, Nigel (29.10.2018)
JulkaisusarjaBank of Finland Research Discussion Papers
JulkaisijaBank of Finland
Julkaisun pysyvä osoite onhttps://urn.fi/URN:NBN:fi:bof-201810292109
Standard New Keynesian models predict implausibly large and favorable responses of inflation and output to expansionary forward guidance on interest rates. We find that the introduction of permanent or recurring active fiscal policy dampens the response of output and inflation to forward guidance in the New Keynesian model. Moreover, the presence of regime-switching policy introduces expectation e ects that cause forward guidance to be less stimulative in our regime-switching model's active money, passive fiscal policy regime. Finally, the introduction of long-term debt a ects the magnitude of the stimulus resulting from forward guidance in models with active fiscal policy.
Forthcoming in International Journal of Central Banking.