Forward guidance without common knowledge

Research output: Contribution to journalReview articlepeer-review

92 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)2477-2512
Number of pages36
JournalAmerican Economic Review
Volume108
Issue number9
DOIs
StatePublished - Sep 2018

ASJC Scopus subject areas

  • Economics and Econometrics

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