The Forward Guidance Puzzle is not a Puzzle

Gauti Eggertsson and Finn D. Schüle

No 33180, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In standard New Keynesian models, future interest rate cuts have larger effects than current cuts—this is called the forward guidance puzzle. We argue that the forward guidance puzzle is not a puzzle. We show the puzzle arises from an implausibly large monetary regime change, exceeding anything in U.S. history since the Great Depression. By calibrating our model to four regime changes during the U.S. Great Depression, disciplined by changes in long-term bond yields, we find the model’s predictions are broadly consistent with historical data.

JEL-codes: E40 E5 E50 N0 N12 (search for similar items in EconPapers)
Date: 2024-11
New Economics Papers: this item is included in nep-cba, nep-dge, nep-his, nep-inv and nep-mon
Note: ME
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