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There is no Forward Guidance Puzzle

Author

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  • Ahn, SeHyoun
  • Holm, Martin Blomhoff

Abstract

According to the forward guidance puzzle, the economy responds more strongly to future than current interest rate cuts in many policy models used by central banks. We show that the puzzle arises only if three conditions are met: (1) a future interest rate cut is announced, (2) an interest rate peg precedes it, and (3) agents are assumed to attribute the peg exclusively to a sequence of monetary policy shocks. Absent any of these conditions, the response to a promised future interest rate cut weakens with the anticipation horizon, and forward guidance is no longer a forceful policy.

Suggested Citation

  • Ahn, SeHyoun & Holm, Martin Blomhoff, 2026. "There is no Forward Guidance Puzzle," CEPR Discussion Papers 21853, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:21853
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    File URL: https://cepr.org/publications/DP21853
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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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