The Forward Guidance Puzzle

Marco Del Negro, Marc Giannoni and Christina Patterson

Journal of Political Economy Macroeconomics, 2023, vol. 1, issue 1, 43 - 79

Abstract: This paper argues that standard dynamic stochastic general equilibrium models grossly overestimate the impact of forward guidance on the macroeconomy, a phenomenon we call the “forward guidance puzzle.” Using data from a panel of Blue Chip survey expectations, we show that accommodative forward guidance had effects on output and inflation expectations that were positive and nontrivial, but still 28 and 8 times smaller, respectively, than implied by standard models. We show that incorporating a perpetual youth structure into the benchmark provides one possible resolution to the puzzle.

Date: 2023
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Related works:
Working Paper: The Forward Guidance Puzzle (2016)
Working Paper: The Forward Guidance Puzzle (2015)
Working Paper: The forward guidance puzzle (2012)
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