Stabilization and expanded commitment: a theory of forward guidance for economies with rational expectations

Hughes Hallett, Andrew and Acocella, Nicola (2014) Stabilization and expanded commitment: a theory of forward guidance for economies with rational expectations. Working Paper. Dipartimento di Metodi e modelli per l'economia, il territorio e la finanza (MEMOTEF), Roma.

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In this paper we construct a general theory of forward guidance in economic policy making, in order to provide a framework to explain the role and strategic advantages of including forward guidance as an explicit part of policy design. We do this by setting up a general policy problem in which forward guidance plays a role and then examine the consequences for performance when that guidance is withdrawn. Following results in Acocella et al (2013), who extend the theory of economic policy to a world with rational expectations, we show that forward guidance provides enhanced controllability and stabilizability – especially where such properties have not been available before. As a by-product we find that forward guidance severely limits the scope and incentives for time inconsistent behaviour in an economy whose policy goals are ultimately reachable. It can therefore add to the credibility of a set of policies.

Item Type: Monograph (Working Paper)
Additional Information: Working paper del Dipartimento di Metodi e modelli per l'economia il territorio e la finanza, Università di Roma La Sapienza, ISSN 2239-608X; Working paper n.132 March 2014
Uncontrolled Keywords: Managing Expectations, Stabilizability, Dynamic Controllability, Time Consistency, Two point boundary solutions
Subjects: 300 Scienze sociali > 330 Economia > 332 Economia finanziaria
Depositing User: Prof. Nicola Acocella
Date Deposited: 01 Sep 2014 13:00
Last Modified: 01 Sep 2014 14:12

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