The forward guidance puzzle

Marco Del Negro, Marc Giannoni and Christina Patterson

No 574, Staff Reports from Federal Reserve Bank of New York

Abstract: With short-term interest rates at the zero lower bound, forward guidance has become a key tool for central bankers, and yet we know little about its effectiveness. This paper first empirically documents the impact of forward guidance announcements on a broad cross section of financial markets data and professional forecasts. We find that Federal Open Market Committee (FOMC) announcements containing forward guidance had heterogeneous effects depending on the other content of the statement. We show that once we control for these other elements, forward guidance had, on average, positive and meaningful effects on output and inflation expectations. Using this benchmark, we then show that standard medium-scale DSGE models tend to grossly overestimate the impact of forward guidance on the macroeconomy, a phenomenon we call the ?forward guidance puzzle.? We explain why this is the case and show that incorporating a perpetual youth structure into the benchmark provides a possible resolution to the puzzle.

Keywords: unconventional monetary policies; forward guidance; DSGE models; perpetual youth models (search for similar items in EconPapers)
JEL-codes: C53 C54 E52 (search for similar items in EconPapers)
Date: 2012
New Economics Papers: this item is included in nep-dge, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (100)

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Related works:
Journal Article: The Forward Guidance Puzzle (2023)
Working Paper: The Forward Guidance Puzzle (2016)
Working Paper: The Forward Guidance Puzzle (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:574

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