Hostname: page-component-89b8bd64d-x2lbr Total loading time: 0 Render date: 2026-05-08T04:42:51.899Z Has data issue: false hasContentIssue false
  • English
  • Français

FORWARD GUIDANCE CONTRACTS

Published online by Cambridge University Press:  13 July 2018

Hans Gersbach ,
Volker Hahn  and
Yulin Liu
Hans Gersbach*
Affiliation:
CER-ETH
Volker Hahn
Affiliation:
University of Konstanz
Yulin Liu
Affiliation:
CER-ETH
*
Address correspondence to: Hans Gersbach, CER-ETH, Center of Economic Research at ETH Zurich, 8092 Zurich, Switzerland; e-mail: hgersbach@ethz.ch.
Get access Rights & Permissions [Opens in a new window]

Abstract

We examine “Forward Guidance Contracts,” which penalize central bankers for choosing high interest rates. We integrate those contracts into the New Keynesian Framework and show that they can be used to overcome a liquidity trap. Moreover, although the government takes only a share of the social benefits into account when it has to decide whether to offer the contract, we demonstrate that for plausible parameter values the government will always find it desirable to offer the contract in a liquidity trap but not in normal times. Finally, we show that the optimal duration of such contracts is typically very short.

Keywords

Forward GuidanceZero Lower BoundCentral BanksIncentive ContractsTransparency

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 23 , Issue 8 , December 2019 , pp. 3386 - 3423
Copyright
Copyright © Cambridge University Press 2018 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Article purchase

Temporarily unavailable

Footnotes

We would like to thank Aleksander Berentsen, Markus Epp, Michael Kumhof, Leonardo Melosi, Nassim Taleb, Martin Tischhauser, Oliko Vardishvili, Michael Woodford, and numerous conference participants for valuable comments on this paper. We are also grateful to the two anonymous referees for helpful suggestions and remarks.

References

REFERENCES

Adam, K. and Billi, R. M. (2006) Optimal monetary policy under commitment with a zero bound on nominal interest rates. Journal of Money, Credit and Banking 38 (7), 1877–1905.Google Scholar
Barro, R. and Gordon, D. B. (1983) Rules, discretion, and reputation in a model of monetary policy. Journal of Monetary Economics 12 (1), 101–121.Google Scholar
Beetsma, R. M. W. J. and Jensen, H. (1998) Inflation targets and contracts with uncertain central banker preferences. Journal of Money, Credit and Banking 30 (3), 384–403.Google Scholar
Beetsma, R. M. W. J. and Jensen, H. (1999) Optimal inflation targets, “conservative” central banks, and linear inflation contracts: Comment. American Economic Review 89 (1), 342–348.Google Scholar
Belgibayeva, A. and Horvath, M. (2017) Real rigidities and optimal stabilization at the zero lower bound in new Keynesian economies. Macroeconomic Dynamics (forthcoming).Google Scholar
Bodenstein, M., Hebden, J., and Nunes, R. (2012) Imperfect credibility and the zero lower bound. Journal of Monetary Economics 59 (2), 135–149.Google Scholar
Campbell, J. R., Evans, C. L., Fisher, J. D. and Justiniano, A. (2012) Macroeconomic effects of Federal Reserve forward guidance. Brookings Papers on Economic Activity 44 (1), 1–80.Google Scholar
Campbell, J. Y. (2008) Asset Prices and Monetary Policy. Chicago, IL: University of Chicago Press.Google Scholar
Carlstrom, C., Fuerst, T., and Paustian, M. (2012) Inflation and Output in New Keynesian Models With a Transient Interest Rate Peg. Bank of England working paper #459.Google Scholar
Clarida, R., Galí, J., and Gertler, M. (1999) The science of monetary policy: A New Keynesian perspective. Journal of Economic Literature 37 (4), 1661–1707.Google Scholar
Clarida, R., Galí, J., and Gertler, M. (2000) Monetary policy rules and macroeconomic stability: Evidence and some theory. Quarterly Journal of Economics 115 (1), 147–180.Google Scholar
Economist (2014) Fixing Forward Guidance, February 15, 2014.Google Scholar
Eggertsson, G. B. (2003) How to Fight Deflation in a Liquidity Trap: Committing to Being Irresponsible. International Monetary Fund working paper 03/64.Google Scholar
Eggertsson, G. B. (2005) Optimal monetary and fiscal policy under discretion in the New Keynesian model: A technical appendix to great expectations and the end of the depression. Federal Reserve Bank of New York staff reports 235.Google Scholar
Eggertsson, G. B. (2006) The deflation bias and committing to being irresponsible. Journal of Money, Credit and Banking 38 (2), 283–321.Google Scholar
Eggertsson, G. B. and Woodford, M. (2003) The zero bound on interest rates and optimal monetary policy. Brookings Papers on Economic Activity 34 (1), 139–235.Google Scholar
European Central Bank, Banking Supervision (2014) Code of Conduct for the Members of the Supervisory Board of the European Central Bank, November 12, 2014.Google Scholar
Fernández-Villaverde, J., Gordon, G., Guerrón-Quintana, P., and Rubio-Ramírez, J. F. (2015) Nonlinear adventures at the zero lower bound. Journal of Economic Dynamics and Control 57, 182–204.Google Scholar
Gersbach, H. and Hahn, V. (2011) Monetary policy inclinations. Journal of Money, Credit and Banking 43 (8), 1707–1717.Google Scholar
Gersbach, H. and Hahn, V. (2014) Inflation forecast contracts. Journal of Economic Dynamics and Control 48, 26–40.Google Scholar
Gurkaynak, R. S., Sack, B., and Swanson, E. T. (2005) Do actions speak louder than words? The response of asset prices to monetary policy actions and statements. International Journal of Central Banking 1 (1), 55–93.Google Scholar
Huang, K. X. D. and Tian, G. (2011) Reputation and optimal contracts for central bankers. Macroeconomic Dynamics 15 (4), 441–464.Google Scholar
Hughes Hallett, A. and Acocella, N. (2018) Stabilization and commitment: Forward guidance in economies with rational expectations. Macroeconomic Dynamics 22 (1), 122–134.Google Scholar
Jensen, H. (1997) Credibility of optimal monetary delegation. American Economic Review 87 (5), 911–920.Google Scholar
Krippner, L. and Thornton, D. L. (2012) A Proposal for Improving Forward Guidance. Federal Reserve Bank of St. Louis Economic Synopses, 2012, No. 27.Google Scholar
Krugman, P. (1998) It's baaack: Japan's slump and the return of the liquidity trap. Brookings Papers on Economic Activity 29 (2), 137–206.Google Scholar
Kydland, F. E. and Prescott, E. C. (1977) Rules rather than discretion: The inconsistency of optimal plans. Journal of Political Economy 85 (3), 473–492.Google Scholar
Levin, A., Lopez-Salido, D., Nelson, E., and Yun, Y. (2010) Limitations on the effectiveness of forward guidance at the zero lower bound. International Journal of Central Banking 6 (1), 143–189.Google Scholar
Lim, W. B. and Goodhart, C. (2011) Interest rate forecasts: A pathology. International Journal of Central Banking 7 (2), 135–172.Google Scholar
Lockwood, B. (1997) State-contingent inflation contracts and unemployment persistence. Journal of Money, Credit and Banking 29 (3), 286–299.Google Scholar
McCallum, B. T. (1995) Two fallacies concerning central-bank independence. American Economic Review 85, 207–211.Google Scholar
Mirkov, N. and Natvik, G. J. (2013) Announcements of interest rate forecasts: Do policymakers stick to them? University of St. Gallen working paper on Finance 1303.Google Scholar
Orphanides, A. and van Norden, S. (2002) The unreliability of output-gap estimates in real time. Review of Economics and Statistics 84 (4), 569–583.Google Scholar
Persson, T. and Tabellini, G. (1993) Designing institutions for monetary stability. Carnegie-Rochester Conference Series on Public Policy 39 (1), 53–84.Google Scholar
Schaumburg, E. and Tambalotti, A. (2007) An investigation of the gains from commitment in monetary policy. Journal of Monetary Economics 54 (2), 302–324.Google Scholar
Svensson, L. E. O. (1997) Optimal inflation targets, “conservative” central banks, and linear inflation contracts. American Economic Review 87 (1), 98–114.Google Scholar
Swiss National Bank, Bankrat (2012) Reglement für private Finanzanlagen und Finanzgeschäfte von Mitgliedern der Bankleitung vom 9. März 2012 (put into force on May 1, 2012) (Regulations on Private Financial Investments and Financial Transactions by Members of SNB Management March 9, 2012).Google Scholar
Thornton, D. L. (2012) Verbal Guidance and the Efficacy of Forward Guidance. Federal Reserve Bank of St. Louis Economic Synopses, 2012, No. 26.Google Scholar
Walsh, C. E. (1995) Optimal contracts for central bankers. American Economic Review 85 (1), 150–167.Google Scholar
Walsh, C. E. (2016) Sustainable Forward Guidance at the ELB. Mimeo, University of California, Santa Cruz.Google Scholar
Werning, I. (2011) Managing a Liquidity Trap: Monetary and Fiscal Policy. NBER working paper 17344.Google Scholar
Woodford, M. (2003a) Interest and Prices: Foundations of a Theory of Monetary Policy. Princeton, New Jersey: Princeton University Press.Google Scholar
Woodford, M. (2003b) Optimal interest-rate smoothing. Review of Economic Studies 70 (4), 861–886.Google Scholar
Woodford, M. (2012) Methods of policy accommodation at the interest-rate lower bound. In Proceedings of the Economic Policy Symposium at Jackson Hole in August 2012, pp. 185–288.Google Scholar
Yun, T. (1996) Nominal price rigidity, money supply endogeneity, and business cycles. Journal of Monetary Economics 37 (2), 345–370.Google Scholar