The power of forward guidance and the fiscal theory of the price level

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Title: The power of forward guidance and the fiscal theory of the price level
ISBN: 978-952-323-246-4
Author: McClung, Nigel
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
ISSN: 1456-6184
Series year: 2018
Series number: 21/2018
Year of publication: 2018
Publication date: 29.10.2018
Pages: 33
Subject (yso): finanssipolitiikka; rahapolitiikka; taloudelliset mallit; tuotanto; inflaatio; hinnat
Keywords: korot
JEL: E63; D84; E50; E52; E58; E60
Other keywords: Forward Guidance; Monetary-Fiscal Policy Interactions; Markov-Switching
Abstract: 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.

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