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Forward Guidance and Macroeconomic Outcomes Since the Financial Crisis

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  • Campbell, Jeffrey R.

    () (Federal Reserve Bank of Chicago)

  • Fisher, Jonas D. M.

    (Federal Reserve Bank of Chicago)

  • Justiniano, Alejandro

    (Federal Reserve Bank of Chicago)

  • Melosi, Leonardo

    (Federal Reserve Bank of Chicago)

Abstract

This paper studies the effects of FOMC forward guidance. We begin by using high frequency identification and direct measures of FOMC private information to show that puzzling responses of private sector forecasts to movements in federal funds futures rates on FOMC announcement days can be attributed entirely to Delphic forward guidance. However a large fraction of futures rates' variability on announcement days remains unexplained, leaving open the possibility that the FOMC has successfully communicated Odyssean guidance. We then examine whether the FOMC used Odyssean guidance to improve macroeconomic outcomes since the financial crisis. To this end we use an estimated medium-scale New Keynesian model to perform a counterfactual experiment for the period 2009q1−2014q4, in which we assume the FOMC did not employ any Odyssean guidance and instead followed its reaction function from before the crisis as closely as possible while respecting the effective lower bound. We find that a purely rule-based policy would have delivered better outcomes in the years immediately following the crisis than FOMC forward guidance did in practice. However starting toward the end of 2011, after the Fed's introduction of “calendar-based” communications, the FOMC's Odyssean guidance appears to have boosted real activity and moved inflation closer to target. We show that our results do not reflect Del Negro, Giannoni, and Patterson (2015)’s forward guidance puzzle.

Suggested Citation

  • Campbell, Jeffrey R. & Fisher, Jonas D. M. & Justiniano, Alejandro & Melosi, Leonardo, 2016. "Forward Guidance and Macroeconomic Outcomes Since the Financial Crisis," Working Paper Series WP-2016-7, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-2016-07
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    Cited by:

    1. repec:tpr:restat:v:100:y:2018:i:1:p:187-202 is not listed on IDEAS
    2. Silvia Miranda-Agrippino, 2015. "Unsurprising Shocks: Information, Premia, and the Monetary Transmission," Discussion Papers 1613, Centre for Macroeconomics (CFM), revised Apr 2016.
    3. Gabaix, Xavier, 2016. "A Behavioral New Keynesian Model," CEPR Discussion Papers 11729, C.E.P.R. Discussion Papers.
    4. Olaf Posch, 2018. "Resurrecting the New-Keynesian Model: (Un)conventional Policy and the Taylor Rule," CESifo Working Paper Series 6925, CESifo Group Munich.
    5. Francesco Bianchi & Leonardo Melosi, 2018. "Constrained Discretion and Central Bank Transparency," The Review of Economics and Statistics, MIT Press, vol. 100(1), pages 187-202, March.
    6. Haberis, Alex & Masolo, Riccardo & Reinold, Kate, 2016. "Deflation probability and the scope for monetary loosening in the United Kingdom," Bank of England working papers 627, Bank of England.
    7. repec:oup:restud:v:84:y:2017:i:2:p:853-884. is not listed on IDEAS
    8. Faccini, Renato & Melosi, Leonardo, 2018. "The Role of News about TFP in U.S. Recessions and Booms," Working Paper Series WP-2018-6, Federal Reserve Bank of Chicago.
    9. Jing Cynthia Wu & Ji Zhang, 2016. "A Shadow Rate New Keynesian Model," NBER Working Papers 22856, National Bureau of Economic Research, Inc.
    10. Leonardo Melosi, 2017. "Signalling Effects of Monetary Policy," Review of Economic Studies, Oxford University Press, vol. 84(2), pages 853-884.
    11. Bilbiie, Florin Ovidiu, 2016. "Optimal Forward Guidance," CEPR Discussion Papers 11251, C.E.P.R. Discussion Papers.
    12. Paul Hubert & Fabien Labondance, 2016. "The Effect of ECB Forward Guidance on Policy Expectations," Working Papers hal-01394821, HAL.
    13. Ambrogio Cesa-Bianchi & Gregory Thwaites & Alejandro Vicondoa, 2016. "Monetary Policy Transmission in an Open Economy: New Data and Evidence from the United Kingdom," Discussion Papers 1612, Centre for Macroeconomics (CFM), revised Aug 2016.

    More about this item

    Keywords

    Monetary policy; Business cycles; Great Recession; Counterfactual policy analysis;

    JEL classification:

    • E00 - Macroeconomics and Monetary Economics - - General - - - General
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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