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The dynamic effects of forward guidance shocks

Author

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  • Bundick, Brent

    () (Federal Reserve Bank of Kansas City)

  • Smith, Andrew Lee

    () (Federal Reserve Bank of Kansas City)

Abstract

We examine the macroeconomic effects of forward guidance shocks at the zero lower bound. Empirically, we identify forward guidance shocks using a two-step procedure, which embeds high-frequency futures contracts in a structural vector autoregression. An exogenous extension of the zero lower bound duration increases economic activity and prices. We show that a standard model of nominal price rigidity largely replicates these empirical results. To calibrate our theoretical model, we generate a model-implied futures curve which allows us to closely link our model with the data. Our results suggest no disconnect between the empirical effects of forward guidance shocks and the predictions from a standard model of monetary policy.

Suggested Citation

  • Bundick, Brent & Smith, Andrew Lee, 2016. "The dynamic effects of forward guidance shocks," Research Working Paper RWP 16-2, Federal Reserve Bank of Kansas City.
  • Handle: RePEc:fip:fedkrw:rwp16-02
    DOI: 10.18651/RWP2016-02
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    File URL: https://doi.org/10.18651/RWP2016-02
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    Cited by:

    1. repec:ucp:macann:doi:10.1086/690242 is not listed on IDEAS
    2. Lakdawala, Aeimit, 2016. "Decomposing the Effects of Monetary Policy Using an External Instruments SVAR," MPRA Paper 78254, University Library of Munich, Germany.
    3. Paul Hubert & Fabien Labondance, 2016. "The Effect of ECB Forward Guidance on Policy Expectations," Working Papers hal-01394821, HAL.
    4. Jeffrey R. Campbell & Jonas D. M. Fisher & Alejandro Justiniano & Leonardo Melosi, 2017. "Forward Guidance and Macroeconomic Outcomes since the Financial Crisis," NBER Macroeconomics Annual, University of Chicago Press, vol. 31(1), pages 283-357.
    5. Christian Bredemeier & Christoph Kaufmann & Andreas Schabert, 2017. "Interest Rate Spreads and Forward Guidance," Working Paper Series in Economics 96, University of Cologne, Department of Economics.

    More about this item

    Keywords

    Forward guidance; Federal funds futures; Zero lower bound;

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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