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  3. American Economic Review
  4. September 2018
  5. Forward Guidance without Common Knowledge

American Economic Review

ISSN 0002-8282 (Print) | ISSN 1944-7981 (Online)

Forward Guidance without Common Knowledge

  • George-Marios Angeletos
  • Chen Lian
American Economic Review
vol. 108, no. 9, September 2018
(pp. 2477–2512)
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Abstract

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.

Citation

Angeletos, George-Marios, and Chen Lian. 2018. "Forward Guidance without Common Knowledge." American Economic Review, 108 (9): 2477–2512. DOI: 10.1257/aer.20161996

Additional Materials

JEL Classification

  • D82 Asymmetric and Private Information; Mechanism Design
  • D83 Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
  • D84 Expectations; Speculations
  • E12 General Aggregative Models: Keynes; Keynesian; Post-Keynesian
  • E23 Macroeconomics: Production
  • E52 Monetary Policy
  • E62 Fiscal Policy