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:10.1080/00036846.2015.1100256

Cited by 10 publications

(8 citation statements)

References 12 publications

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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%

“…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%

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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%

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

Moessner

Jansen

Haan

2016

Journal of Economic Surveys

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“…a condition defining the particular state of the economy under which the central bank would not deliver such a low rate and, instead, it 1. In practice, as remarked by Florez-Jimenez and Parra-Polania (2016), 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.…”

Section: Introductionmentioning

confidence: 99%

“…Previous literature has shown that state-dependent (threshold-based) FG is preferable to time-dependent FG. Florez-Jimenez and Parra-Polania (2016) 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 (2017) also highlight the fact that time-based FG should be used in only very unusual circumstances.…”

Section: Introductionmentioning

confidence: 99%

“… Like Florez‐Jimenez and Parra‐Polania (), but unlike the previous literature, I do not assume that the announced rate,

θ_{t + 1}

, has to be equal to the lower bound (

i_{l}

). Florez‐Jimenez and Parra‐Polania () allow for the central bank to set

θ_{t + 1}

optimally. Their results show that, even in very extreme ZLB episodes, the optimal rate

θ_{t + 1}^{*}

is well above the lower bound (and well below the optimal discretionary rate). …”

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confidence: 99%

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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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