Gaetano Gaballo (Banque de France): Forward guidance and heterogeneous beliefs

Gaetano Gaballo (Banque de France): Forward guidance and heterogeneous beliefs

Co-authors: P. Andrade, E. Mengus and B. Mojon

Abstract

Central banks' announcements that future rates are expected low for some time could signal either a weak macroeconomic outlook – which is bad news – or a more accommodative policy – which is good news. We use the Survey of Professional Forecasters to show that, as the Fed engaged into date-based forward guidance between 2011Q3 and 2012Q4, these two interpretations coexisted despite a consensus that rates will stay low for long. We rationalize these facts in an otherwise standard New-Keynesian model where agents: (i) are uncertain about the length of the trap, (ii) have different priors on the commitment ability of the central bank, and (iii) perceive central bank's announcements of expected rates as accurate. The heterogeneity of beliefs introduces a trade-off in forward guidance policy: leveraging on the optimism of commitment believers comes at the cost of inducing excess pessimism of non-believers. When pessimistic views prevail forward guidance can even be detrimental.

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