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Forward guidance matters: Disentangling monetary policy shocks

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  • Ferreira, Leonardo N.

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. 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 disentangle forward guidance from conventional monetary policy. Results show that conventional monetary policy has the expected effects on industrial production even in a recent US sample and that forward guidance is an effective policy tool, being at least as strong as conventional monetary policy.

Suggested Citation

  • Ferreira, Leonardo N., 2022. "Forward guidance matters: Disentangling monetary policy shocks," Journal of Macroeconomics, Elsevier, vol. 73(C).
  • Handle: RePEc:eee:jmacro:v:73:y:2022:i:c:s0164070422000246
    DOI: 10.1016/j.jmacro.2022.103423
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    Cited by:

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    2. Mirela Miescu, 2022. "Forward guidance shocks," Working Papers 352591340, Lancaster University Management School, Economics Department.
    3. Iryna Kaminska & Haroon Mumtaz & Roman Sustek, 2020. "Monetary policy surprises and their transmission through term premia and expected interest rates," Discussion Papers 2024, Centre for Macroeconomics (CFM).
    4. Kaminska, Iryna & Mumtaz, Haroon & Sustek, Roman, 2021. "Monetary policy surprises and their transmission through term premia and expected interest rates," Bank of England working papers 914, Bank of England, revised 28 Apr 2021.
    5. Agustín Arias & Benjamín García & Ignacio Rojas, 2023. "Forward Guidance: Estimating a Behavioral DSGE Model with System Priors," Working Papers Central Bank of Chile 994, Central Bank of Chile.
    6. José Valentim Machado Vicente & Jaqueline Terra Moura Marins & Wagner Piazza Gaglianone, 2021. "Impacts of the Monetary Policy Committee Decisions on the Foreign Exchange Rate in Brazil," Working Papers Series 552, Central Bank of Brazil, Research Department.

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    More about this item

    Keywords

    Forward guidance; Monetary policy; Narrative sign restrictions; High-frequency identification;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General

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