Forward Guidance without Common Knowledge

George-Marios Angeletos, Chen Lian

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

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Year of publication:	October 2016
Authors:	Angeletos, George-Marios
Other Persons:	Lian, Chen (contributor)
Institutions:	National Bureau of Economic Research (contributor)
Publisher:	Cambridge, Mass : National Bureau of Economic Research
Subject:	Theorie \| Theory \| Geldpolitik \| Monetary policy \| Politische Kommunikation \| Political communication \| Allgemeines Gleichgewicht \| General equilibrium \| Neoklassische Synthese \| Neoclassical synthesis \| Erwartungsbildung \| Expectation formation

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