Abstract
We study the extent to which the belief-formation process affects the dynamics of macroeconomic variables when the central bank uses forward guidance. Recent literature has emphasized two kinds of puzzle associated to forward guidance. First, standard sticky-price models imply that far future forward guidance has huge and implausible effects on current outcomes, these effects grow in its horizon. Second, these models tend to overestimate the effects of central bank’s commitment to keep interest rate below the natural rate for a given period of time. Focusing on the former puzzle, by a parsimonious macro-model that allows for the role of bounded rationality and heterogeneous agents, we obtain tempered responses for both real and nominal variables.
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