TY - JOUR
T1 - Fiscal forward guidance: A case for selective transparency
AU - Fujiwara, Ippei
AU - Waki, Yuichiro
PY - 2019
Y1 - 2019
N2 - Should the fiscal authority use forward guidance to reduce future policy uncertainty perceived by private agents? Using dynamic general equilibrium models, we examine the welfare effects of announcing future fiscal policy shocks and show that selective transparency is desirable — announcing distortionary future policy shocks can be detrimental to ex ante social welfare, whereas announcing non-distortionary shocks generally improves welfare. Sizable welfare gains are found with constructive ambiguity regarding the timing of a tax increase in a realistic fiscal consolidation scenario. However, being secretive about distortionary shocks is time inconsistent, and welfare loss from communication may be unavoidable.
AB - Should the fiscal authority use forward guidance to reduce future policy uncertainty perceived by private agents? Using dynamic general equilibrium models, we examine the welfare effects of announcing future fiscal policy shocks and show that selective transparency is desirable — announcing distortionary future policy shocks can be detrimental to ex ante social welfare, whereas announcing non-distortionary shocks generally improves welfare. Sizable welfare gains are found with constructive ambiguity regarding the timing of a tax increase in a realistic fiscal consolidation scenario. However, being secretive about distortionary shocks is time inconsistent, and welfare loss from communication may be unavoidable.
U2 - 10.1016/j.jmoneco.2019.10.007
DO - 10.1016/j.jmoneco.2019.10.007
M3 - Article
SN - 0304-3932
VL - 116
SP - 236
EP - 248
JO - Journal of Monetary Economics
JF - Journal of Monetary Economics
ER -