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The limits of forward guidance

Jeffrey Campbell, Filippo Ferroni (), Jonas Fisher and Leonardo Melosi ()
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Jeffrey Campbell: Federal Reserve Bank of Chicago
Jonas Fisher: Federal Reserve Bank of Chicago

No 1109, 2019 Meeting Papers from Society for Economic Dynamics

Abstract: Forward guidance allows the Fed to influence private-sector expectations and thereby potentially improve macroeconomic outcomes. This tool's viability depends on the horizon over which the Fed is able to communicate its intentions and its influence on expectations over that horizon. We develop a tractable model of imperfect central bank communications and use it to measure how effectively the Fed has managed private-sector expectations about the future path of the federal funds rate and how its imperfect communications have influenced macroeconomic outcomes. Standard models assume the central bank has perfect control over the private sector's expectations about the policy rate up to an arbitrarily long horizon and this is the source of the so-called ``forward guidance puzzle.'' Our estimated model suggests that the Fed's ability to affect expectations at horizons that are sufficiently long to give rise to the forward guidance puzzle is substantially limited. We also find that imperfect communication has influenced the propagation of forward guidance and is a source of macroeconomic volatility.

New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2019
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Working Paper: The Limits of Forward Guidance (2019) Downloads
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