TY  - JOUR
AU  - Angeletos, George-Marios
AU  - Lian, Chen
TI  - Forward Guidance without Common Knowledge
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 22785
PY  - 2016
Y2  - October 2016
DO  - 10.3386/w22785
UR  - http://www.nber.org/papers/w22785
L1  - http://www.nber.org/papers/w22785.pdf
N1  - Author contact info:
George-Marios Angeletos
Department of Economics, E52-530
MIT
77 Massachusetts Avenue
Cambridge, MA 02139
Tel: 617/452-3859
Fax: 617/253-1330
E-Mail: angelet@mit.edu

Chen Lian
Department of Economics
University of California, Berkeley
Evans Hall
Berkeley, CA 94720
E-Mail: chen_lian@berkeley.edu
AB  - 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.
ER  -