Does my model predict a forward guidance puzzle?

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Title: Does my model predict a forward guidance puzzle?
ISBN: 978-952-323-294-5
Author: Gibbs, Christopher G. ; McClung, Nigel
Organization: Bank of Finland
Series: Bank of Finland Research Discussion Papers
ISSN: 1456-6184
Series year: 2019
Series number: 19/2019
Year of publication: 2019
Publication date: 10.9.2019
Pages: 39
Subject (yso): odotukset; oppiminen; rahapolitiikka
Keywords: vakaus; mallit; korot
JEL: E31; E32; E52; D84; D83
Other keywords: Forward Guidance Puzzle; Expectations; Learning; Stability
Abstract: We provide suffcient conditions for when a rational expectations structural model predicts bounded responses of endogenous variables to forward guidance announcements. The conditions coincide with a special case of the well-known (E)xpectation-stability conditions that govern when agents can learn a Rational Expectations Equilibrium. Importantly, we show that the conditions are distinct from the determinacy conditions. We show how the conditions are useful for diagnosing the features of a model that contribute to the Forward Guidance Puzzle and reveal how to construct well-behaved forward guidance predictions in standard medium-scale DSGE models.

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