Forward Guidance without Common Knowledge /
Angeletos, George-Marios.
Forward Guidance without Common Knowledge / George-Marios Angeletos, Chen Lian. - Cambridge, Mass. National Bureau of Economic Research 2016. - 1 online resource: illustrations (black and white); - NBER working paper series no. w22785 . - Working Paper Series (National Bureau of Economic Research) no. w22785. .
October 2016.
How does the economy respond to news about future policies or future fundamentals? Standard practice assumes that agents have common knowledge of such news and face no uncertainty about how others will respond. Relaxing this assumption attenuates the general-equilibrium effects of news and rationalizes a form of myopia at the aggregate level. We establish these insights within a class of games which nests, but is not limited to, the New Keynesian model. Our results help resolve the forward-guidance puzzle, offer a rationale for the front-loading of fiscal stimuli, and illustrate more broadly the fragility of predictions that rest on long series of forward-looking feedback loops.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.
Forward Guidance without Common Knowledge / George-Marios Angeletos, Chen Lian. - Cambridge, Mass. National Bureau of Economic Research 2016. - 1 online resource: illustrations (black and white); - NBER working paper series no. w22785 . - Working Paper Series (National Bureau of Economic Research) no. w22785. .
October 2016.
How does the economy respond to news about future policies or future fundamentals? Standard practice assumes that agents have common knowledge of such news and face no uncertainty about how others will respond. Relaxing this assumption attenuates the general-equilibrium effects of news and rationalizes a form of myopia at the aggregate level. We establish these insights within a class of games which nests, but is not limited to, the New Keynesian model. Our results help resolve the forward-guidance puzzle, offer a rationale for the front-loading of fiscal stimuli, and illustrate more broadly the fragility of predictions that rest on long series of forward-looking feedback loops.
System requirements: Adobe [Acrobat] Reader required for PDF files.
Mode of access: World Wide Web.