The Power of Open‐Mouth Policies

Abstract Economic agents adjust their behavior in anticipation of announced future policy changes. We develop a novel perturbation‐based extended function path framework to construct nonstationary solutions—time‐dependent decision functions—for economic models with anticipated, non‐Markov news shocks. We apply this framework to evaluate the anticipation effects of policy announcements within a realistically calibrated central banking model. Specifically, we analyze temporary and permanent anticipated changes to policy rules, including shifts in inflation targets and Taylor rule aggressiveness. We also examine anticipated transitions from inflation targeting to price‐level and average‐inflation targeting, finding that these announcements yield economically significant effects.