Credible Forward Guidance

How can the central bank credibly implement a “lower-for-longer” strategy? To answer this question, we analyze series of optimal sustainable policy problems—indexed by duration reputational loss—in sticky-price model with an effective lower bound (ELB) constraint on nominal interest rates. We find that, even when lacks commitment, still keep rate at ELB for extended period—though not as under commitment policy—and meaningfully mitigate adverse effects economic activity.