The dynamic effects of forward guidance shocks

Brent Bundick and Andrew Smith

No RWP 16-2, Research Working Paper from Federal Reserve Bank of Kansas City

Abstract: We examine the macroeconomic effcts of forward guidance shocks at the zero lower bound. Empirically, we identify forward guidance shocks using unexpected changes in futures contracts around monetary policy announcements. We then embed these policy shocks in a vector autoregression to trace out their macroeconomic implications. Forward guidance shocks that lower expected future policy rates lead to moderate increases in economic activity and inflation. After examining forward guidance shocks in the data, we show that a standard model of nominal price rigidity can reproduce our empirical findings. To estimate our theoretical model, we generate a model-implied futures curve which closely links our model with the data. Our results suggest no disconnect between the empirical effects of forward guidance shocks around policy announcements and the predictions from a standard theoretical model.

Keywords: Monetary policy shocks; Forward guidance; Zero lower bound; Impulse response matching (search for similar items in EconPapers)
JEL-codes: E32 E52 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2016-01-15
New Economics Papers: this item is included in nep-mac and nep-mon
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Citations: View citations in EconPapers (30)

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Journal Article: The Dynamic Effects of Forward Guidance Shocks (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedkrw:rwp16-02

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DOI: 10.18651/RWP2016-02

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