Title: On model predictions for forward guidance puzzle
Authors: Nigel McClung - Bank of Finland (Finland) [presenting]
Abstract: Sufficient conditions are provided for when a rational expectations structural model predicts bounded responses of endogenous variables to forward guidance announcements. The conditions coincide with a special case of the well-known (E)xpectation-stability conditions that govern when agents can learn a Rational Expectations Equilibrium. The conditions are distinct from the determinacy conditions and are applicable in a wide variety of models, including models with sunspots or Markov-switching. We show how the conditions can diagnose features of a model that contribute to the Forward Guidance Puzzle and reveal how to construct well-behaved forward guidance predictions in standard medium-scale New Keynesian environments.