Attenuating the forward guidance puzzle: Implications for optimal monetary policy

Abstract We examine the implications of less powerful forward guidance for optimal policy using a sticky-price model with an effective lower bound (ELB) on nominal interest rates as well as a discounted Euler equation and a discounted Phillips curve. When the private-sector agents discount future economic conditions more in making their decisions today, a future rate cut becomes less effective in stimulating current economic activity. Under a wide range of plausible degrees of discounting, it is optimal for the central bank to compensate for the reduced effect of a future rate cut by keeping the policy rate at the ELB for longer.