NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Forward Guidance without Common Knowledge

George-Marios Angeletos, Chen Lian

NBER Working Paper No. 22785
Issued in October 2016, Revised in February 2018
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics

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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Document Object Identifier (DOI): 10.3386/w22785

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