This paper analyzes the effectiveness of optimal incentive-compatible forward guidance at the effective lower bound (ELB) on nominal interest rates when the economy faces occasional financial disruptions. Financial disruptions make households respond less to future monetary shocks because of precautionary-saving motives and make firms respond less to future monetary shocks because the value of current profit increases. As a result, the following three results emerge. First, forward guidance affects the economy at the ELB much less strongly without changing its effect when the economy exits the ELB. Second, the effectiveness of forward guidance becomes weaker even if the central bank has perfect credibility and can commit to forward guidance with a longer horizon than the case without financial disruption. Third, since the output gap and inflation experience more significant deviation from their optimal levels at exit periods, credibility concerns make the effectiveness of optimal sustainable forward guidance even weaker.
"Forward Guidance with Credit Frictions"
"Forward Guidance and Secular Stagnation"