Forward Guidance and Its Effectiveness: A Macro-Finance Shadow-Rate Framework

Junko Koeda and Bin Wei ()
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Junko Koeda: Graduate School of Economics, Waseda University
Bin Wei: Research Department, Federal Reserve Bank of Atlanta

No 2423, Working Papers from Waseda University, Faculty of Political Science and Economics

Abstract: In this paper, we examine the effectiveness of outcome-based forward guidance, a key monetary policy tool that links a central bank’s policy decisions to specific economic outcomes. We develop a novel macro-finance shadow rate term structure model that incorporates unspanned macro factors and an outcome-based liftoff condition. To assess the effectiveness of forward guidance, we propose a novel method that decomposes the shadow rate into components attributable to forward guidance and other unconventional monetary policies. Using maximum likelihood estimation with an extended Kalman filter, we apply the model to both the United States and Japan. Our findings demonstrate that outcome-based forward guidance is effective, delivering significant monetary easing effects on the real economy during both effective lower bound periods of the global financial crisis and the COVID-19 pandemic in the US, as well as during Japan’s era of unconventional monetary policy.

Keywords: forward guidance; effective lower bound (ELB); liftoff; term structure; shadow rate; macro finance; unspanned macro factors (search for similar items in EconPapers)
JEL-codes: E43 E44 E52 E58 (search for similar items in EconPapers)
Pages: 54 pages
Date: 2025-03
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