Forward Guidance and Its Effectiveness: A Macro Finance Shadow-Rate Framework

Junko Koeda () and Bin Wei
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Junko Koeda: https://www.waseda.jp/fpse/faculty-en/2021/04/13/1309/

No 2023-16, FRB Atlanta Working Paper from Federal Reserve Bank of Atlanta

Abstract: Forward guidance provides monetary policy communication for an economy at the effective lower bound (ELB). In this paper, we consider both calendar- and outcome-based forward guidance about the timing of liftoff. We develop a novel macro-finance shadow rate term structure model by introducing unspanned macro factors and an outcome-based liftoff condition. We estimate the model using the maximum likelihood method with extended Kalman filter. Based on the estimation results, we show that outcome-based forward guidance is indeed effective and has significant monetary-easing effects on the real economy in both ELB periods of the global financial crisis (GFC) and the COVID-19 pandemic. In particular, we find that the overall impact on the unemployment rate is about 0.8 percent during both the GFC and the pandemic, but outcome-based forward guidance contributes more in the former than in the latter ELB period (about 0.30 percent versus 0.15 percent).

Keywords: forward guidance; effective lower bound (ELB); liftoff; term structure; shadow rate; macro finance; unspanned macro factors (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 E58 (search for similar items in EconPapers)
Pages: 57
Date: 2023-10-16
New Economics Papers: this item is included in nep-ban, nep-cba and nep-mon
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Citations: View citations in EconPapers (1)

Published in 2023

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DOI: 10.29338/wp2023-16

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