Centre for Development Economics
Department of Economics
Delhi School of Economics
ANNOUNCE A SEMINAR
Forward Guidance in an Uncertain World
by
Smriti Verma
(IIT Kanpur)
(Thursday, September 3, 2026 at 3:00 PM)
Venue: Amex
Abstract:-
I investigate the impact of state-contingent forward guidance in monetary policy in the context of the United States under incomplete markets and aggregate uncertainty. I develop a recursive approach using a global solution method that enables a thorough quantitative study of forward guidance contingent on macroeconomic states—a question that has not been addressed previously in the literature. My results reveal that state-contingent forward guidance generates substantially smaller effects on current output, consumption, and inflation than date-based guidance, which is implemented based on a future calendar date and is independent of future macroeconomic conditions. Households facing aggregate and idiosyncratic risks have stronger precautionary motives for saving than in the absence of aggregate uncertainty, and respond even less to state-contingent policy announcements which leave room for uncertainty about future rate shifts and only partially increase the predictability of future policy, thereby limiting its effectiveness. A global solution method in my work allows for a more accurate analysis of state-contingent forward guidance under aggregate uncertainty, unexplored in prior studies, and infeasible with methods in the literature that rely on local approximations around the deterministic steady state or on assumptions of perfect foresight. This is a contribution to the literature on forward guidance and, more generally, a methodological innovation allowing for the study of broader monetary policy issues in dynamic stochastic environments.