The Power of Forward Guidance and the Fiscal Theory of the Price Level

Nigel McClung

International Journal of Central Banking, 2021, vol. 17, issue 71, 57

Abstract: Standard models predict implausible responses to forward-guidance announcements when interest rates are pegged (the "forward-guidance puzzle"). This paper develops conditions for regime-switching models to exhibit a forward-guidance puzzle,and shows when the fiscal theory of the price level does-and does not-resolve the forward-guidance puzzle. Forward guidance has reasonable effects when real fiscal revenues are very unresponsive to government debt, but in some empirically relevant cases, inflation must ensure debt stability and forward-guidance puzzles are still there. Cyclical variation in deficits also affects the power of forward guidance.

JEL-codes: D84 E50 E52 E58 E60 E63 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: The power of forward guidance and the fiscal theory of the price level (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ijc:ijcjou:y:2021:q:5:a:3

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