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The dynamic effects of forward guidance shocks


  • Brent Bundick
  • Andrew Lee Smith


We examine the macroeconomic effcts of forward guidance shocks at the zero lower bound. Empirically, we identify forward guidance shocks using unexpected changes in futures contracts around monetary policy announcements. We then embed these policy shocks in a vector autoregression to trace out their macroeconomic implications. Forward guidance shocks that lower expected future policy rates lead to moderate increases in economic activity and inflation. After examining forward guidance shocks in the data, we show that a standard model of nominal price rigidity can reproduce our empirical findings. To estimate our theoretical model, we generate a model-implied futures curve which closely links our model with the data. Our results suggest no disconnect between the empirical effects of forward guidance shocks around policy announcements and the predictions from a standard theoretical model.

Suggested Citation

  • Brent Bundick & Andrew Lee Smith, 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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    Cited by:

    1. Kurt Graden Lunsford, 2018. "Understanding the Aspects of Federal Reserve Forward Guidance," Working Papers (Old Series) 1815, Federal Reserve Bank of Cleveland.
    2. Janice C. Eberly & James H. Stock & Jonathan H. Wright, 2020. "The Federal Reserve's Current Framework for Monetary Policy: A Review and Assessment," International Journal of Central Banking, International Journal of Central Banking, vol. 16(1), pages 5-71, February.
    3. Taylor, John, 2018. "Taylor Rules and Forward Guidance: A Rule is not a Path," CEPR Discussion Papers 13383, C.E.P.R. Discussion Papers.
    4. Giovanni Pellegrino & Efrem Castelnuovo & Giovanni Caggiano, 2021. "Uncertainty and Monetary Policy during the Great Recession," CESifo Working Paper Series 8985, CESifo.
    5. Philipp Hartman & Frank Smets, 2018. "The European Central Bank’s Monetary Policy during Its First 20 Years," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 49(2 (Fall)), pages 1-146.
    6. 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.
    7. Paul Hubert & Fabien Labondance, 2018. "The Effect of ECB Forward Guidance on the Term Structure of Interest Rates," International Journal of Central Banking, International Journal of Central Banking, vol. 14(5), pages 193-222, December.
    8. Hartmann, Philipp & Smets, Frank, 2018. "The first twenty years of the European Central Bank: monetary policy," Working Paper Series 2219, European Central Bank.
    9. Giovanni Pellegrino & Efrem Castelnuovo & Giovanni Caggiano, 2020. "Uncertainty and Monetary Policy during Extreme Events," CESifo Working Paper Series 8561, CESifo.
    10. Maximilian Böck & Martin Feldkircher & Pierre L. Siklos, 2021. "International Effects of Euro Area Forward Guidance," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 83(5), pages 1066-1110, October.
    11. Lukas Hoesch & Barbara Rossi & Tatevik Sekhposyan, 2023. "Has the Information Channel of Monetary Policy Disappeared? Revisiting the Empirical Evidence," American Economic Journal: Macroeconomics, American Economic Association, vol. 15(3), pages 355-387, July.
    12. 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.
    13. Aeimit Lakdawala, 2019. "Decomposing the effects of monetary policy using an external instruments SVAR," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 34(6), pages 934-950, September.
    14. Xu Zhang, 2018. "Evaluating the Effects of Forward Guidance and Large-scale Asset Purchases," 2018 Meeting Papers 894, Society for Economic Dynamics.
    15. Kurt G. Lunsford, 2020. "Policy Language and Information Effects in the Early Days of Federal Reserve Forward Guidance," American Economic Review, American Economic Association, vol. 110(9), pages 2899-2934, September.
    16. Paul Hubert & Fabien Labondance, 2016. "The Effect of ECB Forward Guidance on Policy Expectations," Working Papers hal-01394821, HAL.
    17. Brubakk, Leif & ter Ellen, Saskia & Robstad, Ørjan & Xu, Hong, 2022. "The macroeconomic effects of forward communication," Journal of International Money and Finance, Elsevier, vol. 120(C).
    18. Ferreira, Leonardo N., 2022. "Forward guidance matters: Disentangling monetary policy shocks," Journal of Macroeconomics, Elsevier, vol. 73(C).
    19. repec:hal:spmain:info:hdl:2441/2g6qj1trtu8q2r79ee4jp49krd is not listed on IDEAS
    20. Xu Zhang, 2021. "Evaluating the Effects of Forward Guidance and Large-scale Asset Purchases," Staff Working Papers 21-54, Bank of Canada.
    21. Lilia Maliar & John B. Taylor, 2019. "Forward Guidance: Is It Useful Away from the Lower Bound?," NBER Working Papers 26053, National Bureau of Economic Research, Inc.
    22. Rossi, Barbara, 2019. "Identifying and Estimating the Effects of Unconventional Monetary Policy: How to Do It And What Have We Learned?," CEPR Discussion Papers 14064, C.E.P.R. Discussion Papers.
    23. Couture, Cody, 2021. "Financial market effects of FOMC projections," Journal of Macroeconomics, Elsevier, vol. 67(C).
    24. Sims, Eric & Wu, Jing Cynthia, 2021. "Evaluating Central Banks’ tool kit: Past, present, and future," Journal of Monetary Economics, Elsevier, vol. 118(C), pages 135-160.
    25. repec:hal:spmain:info:hdl:2441/61ma1iq1299m89uud61kkjcjot is not listed on IDEAS

    More about this item


    Monetary policy shocks; Forward guidance; Zero lower bound; Impulse response matching;
    All these keywords.

    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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