discussion in Roma

1. Forward Misguidance
Claudio Michelacci & Luigi Paciello
Discussion by P. Andrade
6th BI-CEPR Conference on Money Banking and Finance
June 10, 2016
The views expressed here are mine and do not necessarily represent those
of the Banque de France or the Eurosystem.

2. What do we know about unconventional monetary policies?
2 main views of why they work
Changes in price of risk / intertemporal substitution
RA: signal future accommodation / inflation for every agents ⇒ FG
HA: redistribute wealth btw agents ⇒ QE
Challenges
In quantitative models, signalling needed to get sizeable effects of
QE on macro variables.
However, given impact on yield curve, FG should have had much
bigger macro effects: FG puzzle (Del Negro et al., 2013).
FG need to be trusted (time-inconsistent) and understood
(Woodford, 2012)

3. What do we know about unconventional monetary policies?
Crossing btw the two approaches
QE in RA
helps solving the commitment pb of FG
(Battarai-Eggertsson-Gafarov, 2013)
FG in HA: wedge in Euler equation of RA because of
heterogenous wealth and credit constraints
(McKay-Nakamura-Steinsson, 2015);
heterogenous beliefs on CB’s commitment
(Andrade-Gaballo-Mengus-Mojon, 2015);
This paper: FG with 2 dimensions of heterogeneity ⇒ wealth+beliefs

4. Model
One underlying factor: trust in financial institutions. More trust ⇒
higher net financial asset position (wealth)
higher credibility of ECB policy (beliefs)
ECB FG = promise of future inflation
trust: more exposed to inflation risk
trust: supplementary inflation is credible
FG redistributes resources away from agents who believe the most in
it
agents who believe the less in FG are the one who benefit from it
Net effect depends on weight of creditors who believe in the policy

5. Empirics
Regional Italian data: nfa, trust in ECB, household inflation
expectations, inflation realizations.
Regression results in line with implications of the model:
FG associated with higher/lower inflation expectations/realizations in
creditors than in debtors provinces.
More trust in ECB associated with lower/higher inflation after FG in
creditors/debtors provinces.
Calibration show misguidance effect dominates.

6. Original channels of “misguidance”
Heterogenous wealth
FG less effective because of less financially constrained agents
= McKay et al.(2015): constrained agents reduce FG effectiveness.
Heterogenous beliefs
FG less effective because agents believe the policy will work /
increase future inflation.
= Andrade et al. (2015): some agents interpret the policy as bad
news / lower future inflation.

7. Empirics: Is it really FG?
Impact of trust / creditor on inflation and inflation expectations over
2013Q2-2014Q4 period.
A lot of other things happened
Nov 2013 : 25bps drop
June 2014: 10bps MRO drop + negative DFR (-10bps) + TLTROs
+ commitment to full liquidity allotment over the 4 years of TLTROs
Sep 2014 : 10bps MRO drop + negative DFR (-20bps)
Actually FG was not very effective on yield curve (loose statement)
The Governing Council expects the key ECB interest rates
to remain at present or lower levels for an extended period
of time.

8. Empirics: Is it really FG?
Weak impact of FG on expected IR
Figure: Expected short-term IR in EA from survey (SPF) or markets (OIS)

9. Model: What is trust?
Trust in financial markets ⇒ trust in ECB ⇒.
believe in future accommodation / inflation.
By why
Trust in stabilizing role of ECB? Here FG does not stabilize
Trust in ECB protecting creditors’ interest? Here FG tax them
Trust because of financial literacy / education ⇒ information
Better explain imperfect information
What do the non-trust agents know? Why do they react to the FG
shock?
Why can’t they infer from outcomes what the trust / informed agent
know about policy?

10. Other comments
Misguidance lowers effectiveness of FG; but is FG detrimental?
You find boom in the future at the cost of contraction today ⇒ is it
better not to do FG?
What if effect of FG on risk / value of financial assets (then creditors
also benefit)
Policy
Should policy be more aggressive (keep IR at zero for longer)?
Explain better the consequences of FG to debtors
Reduce the trust of creditors?