Managing Expectations: Instruments vs. Targets / George-Marios Angeletos, Karthik A. Sastry.

Format:

Book

Author/Creator:

Angeletos, George-Marios.

Contributor:

National Bureau of Economic Research.

Sastry, Karthik A.

Series:

Working Paper Series (National Bureau of Economic Research) no. w25404.

NBER working paper series no. w25404

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

Managing Expectations

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2018.

Summary:

Should policymakers offer forward guidance in terms of a path for an instrument such as interest rates or a target for an outcome such as unemployment? We study how the optimal approach depends on a departure from rational expectations. People have a limited understanding of the behavior of others and of the general equilibrium (GE) effects of policy. The bite of such bounded rationality on implementability and welfare is minimized by target-based guidance if and only if GE feedbacks are strong enough. This offers a rationale for why central banks should shine the spotlight on unemployment when faced with a prolonged liquidity trap, a steep Keynesian cross, or a large financial accelerator.

Notes:

Print version record

December 2018.