December 2021 issue contents
The Power of Forward Guidance and the Fiscal Theory of the Price Level

Nigel McClunga


Standard models predict implausible responses to forward-guidance announcements when interest rates are pegged (the "forward-guidance puzzle"). This paper develops conditions for regime-switching models to exhibit a forward-guidance puzzle,and shows when the fiscal theory of the price level does-and does not-resolve the forward-guidance puzzle. Forward guidance has reasonable effects when real fiscal revenues are very unresponsive to government debt, but in some empirically relevant cases, inflation must ensure debt stability and forward-guidance puzzles are still there. Cyclical variation in deficits also affects the power of forward guidance.

JEL Code: E63, D84, E50, E52, E58, E60.

  Full article (PDF, 57 pages)

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