Dr Viktor Marinkov, University of Oxford

"Communication at the Zero Lower Bound: The Case for Forward Guidance"
Thursday, 18 May. 3 pm
Room 540 A (Main Building)

Abstract

Forward guidance has become an integral part of the policy arsenal of central banks, yet its effectiveness was assumed to rely on the bank’s commitment to high future inflation. In this paper, I show a novel mechanism which generates disagreement in interest rate forecasts between the central bank (CB) and the agents and calls for forward guidance as a communication device without any policy deviations.
The zero lower bound (ZLB) acts as an informational curtain for adaptively learning agents as they cannot observe the path of the hypothetical shadow rate. I prove analytically that this biases agents’ forecast upwards towards earlier lift-off, consistent with data from the FED, Swedish Riksbank and surveys. The disagreement, coupled with the learning agents, results in unanchored expectations and explosive dynamics. Forward guidance then restores stability at the ZLB by preventing spurious expectational drift. Thus, the paper calls for transparent communication by the CB in ZLB environments. Although such communication is welfare-improving, no forward guidance puzzle is present.

Bio

Viktor Marinkov is a post-doctoral fellow at the University of Oxford, having obtained his PhD from the European University Institute. His research spans expectations in macroeconomics, monetary policy and productivity. Two general themes are understanding the importance of deviations from rational expectations and full information for explaining macroeconomic phenomena and the evolution of productivity differences between countries.

For further information, please contact business-school-research@glasgow.ac.uk

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First published: 14 May 2023

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