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24. Oktober 2018


When and Why Can Forward Guidance De-anchor Expectations? (with Gaetano Gaballo, Peter Hoffmann and Georg Strasser)


24. Oktober 2018


Joan Robinson Room
DIW Berlin
Room 3.3.002a
Mohrenstraße 58
10117 Berlin


Michael Ehrmann, European Central Bank

The form of forward guidance matters for its effectiveness in anchoring expectations about the future path of policy rates. We report cross-country evidence about the impact of different types of forward guidance on the reactiveness of markets to macroeconomic news and on disagreement across forecasters, and show that timecontingent forward guidance over a short horizon and open-ended forward guidance are ineffective at best, and add uncertainty about the policy path at worst. Time-contingent forward guidance over long horizons makes asset prices entirely unresponsive to incoming news, and eliminates all disagreement across forecasters, whereas state-contingent forward guidance preserves some responsiveness and some disagreement. We also show that in the presence of asset purchases, forward guidance anchors expectations more effectively. We rationalize our findings with a rational expectations model with noisy market information, where the precision of the market signal depends on how strongly agents respond to their own private information, which becomes less relevant after forward guidance.


Michael Ehrmann, European Central Bank