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Forward Guidance Matters: Disentangling Monetary Policy Shocks

Leonardo Ferreira ()

No 912, Working Papers from Queen Mary University of London, School of Economics and Finance

Abstract: Central banks have usually employed short-term rates as the main instrument of monetary policy. In the last decades, however, forward guidance has also become a central tool for monetary policy. In an innovative way this paper combines two sources of extraneous information-high frequency surprises and narrative evidence-with sign restrictions in a structural vector autoregressive (VAR) model to fully disentangle the e ects of forward guidance shocks from the e ects of conventional monetary policy shocks. Results show that conventional monetary policy has the expected e ects even in a recent US sample, in contrast with the evidence reported by Barakchian and Crowe (2013) and Ramey (2016), and that forward guidance is an e ective policy tool. In fact, it is at least as strong as conventional monetary policy.

Keywords: Forward Guidance; Monetary Policy; Narrative Sign Restrictions; High-frequency identification (search for similar items in EconPapers)
JEL-codes: C11 C50 E30 E32 E43 E52 E58 (search for similar items in EconPapers)
Date: 2020-09-15
New Economics Papers: this item is included in nep-mac, nep-mon and nep-ore
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