Fiscal forward guidance: A case for selective transparency

Ippei Fujiwara, Yuichiro Waki

Research output: Contribution to journalArticle

Abstract

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.

Original languageEnglish
JournalJournal of Monetary Economics
DOIs
Publication statusAccepted/In press - 2019 Jan 1

Keywords

  • Bayesian persuasion
  • Fiscal policy
  • Forward guidance
  • News shock
  • Private information

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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