Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/184678
Authors: 
Ahrens, Steffen
Lustenhouwer, Joep
Tettamanzi, Michele
Year of Publication: 
2018
Series/Report no.: 
BERG Working Paper Series 137
Abstract: 
Expectations are among the main driving forces for economic dynamics. Therefore, managing expectations has become a primary objective for monetary policy seeking to stabilize the business cycle. In this paper, we study whether central banks can manage market expectations by means of forward guidance in a New Keynesian learning-to-forecast experiment. Forward guidance takes the form of one-period ahead inflation projections that are published by the central bank in each period. Subjects in the experiment observe these projections along with the historic development of the economy and subsequently submit their own one-period ahead inflation forecasts. In this context, we find that the central bank can significantly manage market expectations through forward guidance and that this management strongly supports monetary policy in stabilizing the economy. Moreover, forward guidance drastically reduces the probability of a deflationary spiral after strong negative shocks to the economy.
Subjects: 
learning-to-forecast experiment
forward guidance
heterogeneous expectations
JEL: 
C92
E32
E37
E58
ISBN: 
978-3-943153-58-3
Document Type: 
Working Paper

Files in This Item:
File
Size
686.12 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.