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The Forward Guidance Puzzle

Marc Giannoni (), Christina Patterson and Marco Del Negro ()
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Christina Patterson: MIT

No 1529, 2015 Meeting Papers from Society for Economic Dynamics

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. We 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," and explain why this is the case. We document the impact of forward guidance announcements on 1) a broad cross section of financial markets data, and 2) on the panel of Blue Chip forecasts. We find that this effect has been very heterogeneous across announcements and relate this heterogeneity to the type of forward guidance, whether delphic (news about the economy) or odyssean. We also discuss various explanations to the puzzle that have been advanced in the literature.

New Economics Papers: this item is included in nep-dge, nep-ifn and nep-mac
Date: 2015
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Working Paper: The Forward Guidance Puzzle (2016)
Working Paper: The forward guidance puzzle (2015) Downloads
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