The Forward Guidance Puzzle

Marc Giannoni, Christina Patterson and Marco Del Negro
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Christina Patterson: Federal Reserve Bank of New York

No 143, 2016 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. 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 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.

Date: 2016
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Related works:
Journal Article: The Forward Guidance Puzzle (2023)
Working Paper: The Forward Guidance Puzzle (2015)
Working Paper: The forward guidance puzzle (2012)
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed016:143

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