Forward guidance contracts

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Date
2019
Authors
Gersbach, Hans
Liu, Yulin
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Macroeconomic Dynamics ; 23 (2019), 8. - pp. 3386-3423. - ISSN 1365-1005. - eISSN 1469-8056
Abstract
We examine “Forward Guidance Contracts,” which penalize central bankers for choosing high interest rates. We integrate those contracts into the New Keynesian Framework and show that they can be used to overcome a liquidity trap. Moreover, although the government takes only a share of the social benefits into account when it has to decide whether to offer the contract, we demonstrate that for plausible parameter values the government will always find it desirable to offer the contract in a liquidity trap but not in normal times. Finally, we show that the optimal duration of such contracts is typically very short.
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Subject (DDC)
330 Economics
Keywords
Forward Guidance, Zero Lower Bound, Central Banks, Incentive Contracts, Transparency
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Cite This
ISO 690GERSBACH, Hans, Volker HAHN, Yulin LIU, 2019. Forward guidance contracts. In: Macroeconomic Dynamics. 23(8), pp. 3386-3423. ISSN 1365-1005. eISSN 1469-8056. Available under: doi: 10.1017/S1365100518000093
BibTex
@article{Gersbach2019-12Forwa-45132,
  year={2019},
  doi={10.1017/S1365100518000093},
  title={Forward guidance contracts},
  number={8},
  volume={23},
  issn={1365-1005},
  journal={Macroeconomic Dynamics},
  pages={3386--3423},
  author={Gersbach, Hans and Hahn, Volker and Liu, Yulin}
}
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