NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
loading...

Managing Expectations: Instruments vs. Targets

George-Marios Angeletos, Karthik A. Sastry

NBER Working Paper No. 25404
Issued in December 2018, Revised in March 2020
NBER Program(s):Economic Fluctuations and Growth, Monetary Economics

Should a policymaker offer forward guidance in terms of a path for an instrument such as interest rates or a target for an outcome such as unemployment? We study how the optimal approach depends on bounded rationality. People make mistakes in reasoning about the behavior of others and the equilibrium mapping between policy and outcomes. The policymaker wishes to minimize the effects of such mistakes on implementability and welfare. This goal is achieved by target-based forward guidance if and only if GE feedback is strong enough, as when faced with a prolonged liquidity trap, a steep Keynesian cross, or a large financial accelerator.

download in pdf format
   (675 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w25404

 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us