Odyssean Forward Guidance in Normal Times

We present a systematic treatment of dynamic e⁄ects of Odyssean forward guidance explicit announcements about future policy rates. We focus on normal times unlike the mainstream of the literature that focuses on episodes of an e⁄ective (zero) lower bound on nominal interest rates. We present novel closed-form solutions to both deterministic and stochastic versions of a stylized new Keynesian model with fully anticipated future shocks. We establish a theorem that delineates the parameter space into real and complex-root regions characterized by di⁄erent characteristic roots. We formulate a simple recipe for testing the e⁄ectiveness of forward guidance: the size of the smallest root is a single su¢ cient statistics that determines whether or not forward guidance generates signi cant contemporaneous e⁄ects