The Delphic forward guidance puzzle in New Keynesian models

When the central bank has information that can help the private sector better predict the future, should it communicate such information to the public? In purely forward-looking New Keynesian models, such Delphic forward guidance unambiguously reduces ex ante welfare by increasing the variability of...

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Bibliographic Details
Published inReview of economic dynamics Vol. 46; pp. 280 - 301
Main Authors Fujiwara, Ippei, Waki, Yuichiro
Format Journal Article
LanguageEnglish
Published Elsevier Inc 01.10.2022
Subjects
Bayesian persuasion
Forward guidance
New Keynesian models
News shock
Optimal monetary policy
Private information
E40
E50
Bayesian persuasion
E30
Private information
Optimal monetary policy
New Keynesian models
Forward guidance
News shock
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Summary:When the central bank has information that can help the private sector better predict the future, should it communicate such information to the public? In purely forward-looking New Keynesian models, such Delphic forward guidance unambiguously reduces ex ante welfare by increasing the variability of inflation and the output gap. We call this phenomenon the Delphic forward guidance puzzle. In more elaborate models with endogenous state variables, a combination of Delphic forward guidance and preemptive policy actions may improve welfare. However, full information revelation is generally not optimal and what information needs to be revealed is highly model-dependent.
ISSN:1094-2025
1096-6099
DOI:10.1016/j.red.2021.10.002