Inconsistent Forward Guidance Leads to Unpredictable Central Bank Actions.
State-dependent forward guidance is more effective than unconditional forward guidance in zero lower-bound situations. When the threshold for reverting to optimal policy is announced based on an exogenous variable, the solution remains consistent. However, announcing the threshold based on an endogenous variable can lead to inconsistency between actions taken and central bank announcements. This inconsistency can limit the policy rate that can be set, as reverting to the optimal rate may conflict with exceeding the threshold.