Forward guidance relies on shifting expectations of income and inflation. These expectations matter through general-equilibrium mechanisms, including two known as the deflationary spiral and the income multiplier. Recasting these expectations and these mechanisms in terms of higher-order beliefs reveals how the predictions of the New-Keynesian model--and some of its anomalies--hinge of the combination of a strong equilibrium concept with strong informational assumptions. Relaxing these assumptions anchors the expectations and attenuates the mechanisms. This attenuation increases with the horizon at which forward guidance operates, as well as with the degree of price flexibility. We thus lessen, not only the forward-guidance puzzle, but also the paradox of flexibility. We also operationalize the notion that policy makers may find it hard to shift expectations of income and inflation even if they can easily shift expectations of policy.
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