Forward guidance and quantitative easing at the Zero Lower Bound

Abstract

This paper uses the Sims and Wu (2020) New Keynesian model to derive the optimal combinations of forward guidance policies and quantitative easing (QE) at the Zero Lower Bound. We also illustrate how a Taylor Rule, with an optimally chosen inflation target, implements forward guidance, when quantitative easing eliminates the financial friction. We find that the theorem for the Taylor rule implementation of optimal forward guidance in Chattopadhyay and Daniel (2018) is robust in the Sims and Wu (2020) New Keynesian model when QE completely eliminates the financial friction.