Forward Guidance without Common Knowledge
By George-Marios Angeletos, Chen Lian. The American Economic Review, 2018
279 citations recorded by the source corpus.
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. (JEL D82, D83, D84, E12, E23, E52, E62)
Subfields: Economics and Econometrics
View Paper: https://www.semanticscholar.org/paper/430563e5c8dcf50376bb324f8b6675780b3bd355
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In Economics and Econometrics
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Citations in the corpus
- On DSGE Models (2018, unknown): “Argov et al. (2012) describe the DSGE model used for policy analysis at the Bank of Israel, Dorich et al.”
- The Slope of the Phillips Curve: Evidence from U.S. States (2020, background): “Recent work has shown that plausible deviations from full rationality or common knowledge yield a Phillips curve that is less forward looking (Angeletos and Lian 2018; Gabaix 2020).”
- A Behavioral New Keynesian Model (2020, background): “This literature has studied how lack of common knowledge and higher-order uncertainty can anchor expectations of endogenous outcomes, such as past inflation (e.g. Woodford (2003a), Nimark (2008), Angeletos and La’O (2010) and Angeletos and Lian (2016)).”
- HOW DOES CONSUMPTION RESPOND TO NEWS ABOUT INFLATION? FIELD EVIDENCE FROM A RANDOMIZED CONTROL TRIAL (2019, background): “Angeletos and Lian (2018) stress imperfect common knowledge as a related mechanism.2 In contrast to these papers, we emphasize the importance of durable goods spending in explaining the total spending response of households when inflation expectations are revised.”