Forward guidance with an escape clause : when half a promise is better than a full one

Florez-Jimenez, Maria Lucia; Parra-Polanía, Julián Andrés

doi:10.32468/be.811

Cited by 4 publications

(6 citation statements)

References 11 publications

(2 reference statements)

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“…() analyse threshold‐based forward guidance using global solution methods. Relative to Florez‐Jimenez and Parra‐Polania (), Boneva et al . () examine threshold‐based forward guidance defined on endogenous variables (rather than exogenous shocks) and use the (more standard) infinite horizon variant of the simple New Keynesian model.…”

Section: Theory Of Communication About Future Policy Ratesmentioning

confidence: 99%

“…Several recent papers study forward guidance augmented with thresholds or escape clauses, once again assuming commitment by the central bank (Coenen and Warne, ; English et al ., ; Florez‐Jimenez and Parra‐Polania, ; Boneva et al ., ). A threshold could mean something different for a central bank that already has an explicit inflation target than for a central bank without such a target.…”

Section: Theory Of Communication About Future Policy Ratesmentioning

confidence: 99%

“…The effect of escape clauses in a model with forward guidance under commitment has been studied by Florez‐Jimenez and Parra‐Polania (). Such a clause can improve welfare, since it allows the central bank to avoid cases in which the cost of reduced flexibility is too high, but only provided the shock is not too large.…”

Section: Theory Of Communication About Future Policy Ratesmentioning

confidence: 99%

See 2 more Smart Citations

Communication About Future Policy Rates in Theory and Practice: A Survey

Moessner

Jansen

Haan

2016

Journal of Economic Surveys

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We discuss the theoretical rationale for central bank communication about future policy rates, either as part of inflation targeting or in the form of forward guidance. We also summarize both actual central bank communication about future policy rates and empirical evidence on the effectiveness of these types of communication. We argue that there is a disconnect between the theory and practice of forward guidance, as theory assumes commitment on the part of the central bank, while in practice central banks generally do not commit. Future theoretical research on forward guidance should therefore take the absence of commitment by central banks into account.

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Section: Theory Of Communication About Future Policy Ratesmentioning

confidence: 99%

Section: Theory Of Communication About Future Policy Ratesmentioning

confidence: 99%

Section: Theory Of Communication About Future Policy Ratesmentioning

confidence: 99%

See 1 more Smart Citation

Communication About Future Policy Rates in Theory and Practice: A Survey

Moessner

Jansen

Haan

2016

Journal of Economic Surveys

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“…Previous literature has shown that state‐dependent (threshold‐based) FG is preferable to time‐dependent FG. Florez‐Jimenez and Parra‐Polania () show that unconditional FG performs poorly except in the most extreme ZLB events and that for any ZLB situation it is better to resort to state‐dependent FG. Feroli et al .…”

Section: Introductionmentioning

confidence: 99%

“… In practice, as remarked by Florez‐Jimenez and Parra‐Polania (), it is difficult to characterise a specific FG policy as purely Odyssean since, when following a FG strategy, some central bank’s actions seem to be more related to the purpose of making information clearer or revealing private information ( Delphic FG). In some cases, the central bankers themselves have stated that their FG policies are not Odyssean. …”

mentioning

confidence: 99%

State-Dependent Forward Guidance and the Problem of Inconsistent Announcements

Parra-Polanía

2019

German Economic Review

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Forward guidance can be provided as an unconditional promise, i.e. commitment to a specific low policy rate. Alternatively, the promise may include an escape clause, i.e. a condition defining the state of the economy under which the central bank would not keep such a low rate and, instead, it would revert to setting policy under discretion. The escape clause can be expressed as a threshold in terms of a specific variable. The present paper shows that, when such a threshold is expressed in terms of an endogenous variable (e.g. output, inflation), there are cases where it becomes impossible for the central bank to act in a way that is consistent with its promise. Consistency imposes limits on the policy rate that can be set since reverting immediately to the optimal discretionary rate can be incompatible with exceeding the threshold.

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Communication About Future Policy Rates in Theory and Practice: A Survey

2015

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We discuss the theoretical rationale for central bank communication about future policy rates as part of inflation targeting or of forward guidance. We also summarize actual central bank communication about future policy rates in major advanced countries as well as empirical evidence on the effectiveness of both types of communication. We argue that there is a disconnect between the theory and practice of forward guidance, with theory assuming commitment by the central bank, while in practice central banks generally do not commit. Future theoretical research on forward guidance should therefore take the absence of commitment by central banks into account.

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Forward guidance with an escape clause : when half a promise is better than a full one

Cited by 4 publications

References 11 publications

Communication About Future Policy Rates in Theory and Practice: A Survey

Communication About Future Policy Rates in Theory and Practice: A Survey

State-Dependent Forward Guidance and the Problem of Inconsistent Announcements

Communication About Future Policy Rates in Theory and Practice: A Survey

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