The Delphic forward guidance puzzle in New Keynesian models

Ippei Fujiwara; Yuichiro Waki

doi:10.1016/j.red.2021.10.002

The Delphic forward guidance puzzle in New Keynesian models

Ippei Fujiwara, Yuichiro Waki^*

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

1 Citation (Scopus)

Abstract

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.

Original language	English
Pages (from-to)	280-301
Number of pages	22
Journal	Review of Economic Dynamics
Volume	46
DOIs	https://doi.org/10.1016/j.red.2021.10.002
Publication status	Published - Oct 2022

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title = "The Delphic forward guidance puzzle in New Keynesian models",

abstract = "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.",

keywords = "Bayesian persuasion, Forward guidance, New Keynesian models, News shock, Optimal monetary policy, Private information",

author = "Ippei Fujiwara and Yuichiro Waki",

note = "Publisher Copyright: {\textcopyright} 2021 Elsevier Inc.",

year = "2022",

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doi = "10.1016/j.red.2021.10.002",

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AU - Waki, Yuichiro

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N2 - 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.

AB - 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.

KW - Bayesian persuasion

KW - Forward guidance

KW - New Keynesian models

KW - News shock

KW - Optimal monetary policy

KW - Private information

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JO - Review of Economic Dynamics

JF - Review of Economic Dynamics

ER -

The Delphic forward guidance puzzle in New Keynesian models

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