Question

In which economic conditions would a central bank want to use a “forward-guidance” strategy? Based on your previous answer, can we easily measure the effects of such a strategy?

Short answer

The availability of low government credibility and high inflation is the economic condition under which a central bank would want to use a forward guidance strategy, and the effects of such a strategy are easily measured.

Step-by-step solution

Concept Introduction 

Forward guidance is the assurance given by the government of an economy to its citizens about the intended changes in monetary policy in the future so that people can make informed decisions based on expected interest rates and inflation rates.

Explanation of Solution 

The condition that a central bank would want to use a forward guidance strategy is one of low credibility. When a country's government lacks credibility, providing forward guidance can help the government regain credibility, which is important for keeping inflation low in the long run. The government is able to provide information to the public about the intended change in policy through forward guidance, which helps to keep interest rates and inflation low while also increasing credibility.

Yes, the effects of such a strategy are easily measurable, as the strategy includes changes in public decision-making as a result of the intended change in interest rates. Changes in decisions would keep interest rates low or high depending on the situation, reducing or increasing the rate of inflation in an economy, which is easily measurable.