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The forward guidance puzzle

  • Marco Del Negro
  • Marc Giannoni
  • Christina Patterson

With short-term interest rates at the zero lower bound, forward guidance has become a key tool for central bankers, and yet we know little about its effectiveness. Standard medium-scale DSGE models tend to grossly overestimate the impact of forward guidance on the macroeconomy—a phenomenon we call the “forward guidance puzzle.” We explain why this is the case and describe one approach to addressing this issue.

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Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 574.

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Date of creation: 2012
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Handle: RePEc:fip:fednsr:574
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  1. Refet Gürkaynak & Brian P. Sack & Eric T. Swanson, 2004. "Do actions speak louder than words? the response of asset prices to monetary policy actions and statements," Finance and Economics Discussion Series 2004-66, Board of Governors of the Federal Reserve System (U.S.).
  2. Rochelle M. Edge & Refet S. Gurkaynak, 2010. "How Useful Are Estimated DSGE Model Forecasts for Central Bankers?," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 41(2 (Fall)), pages 209-259.
  3. Michael D. Bauer & Glenn D. Rudebusch, 2011. "The signaling channel for Federal Reserve bond purchases," Working Paper Series 2011-21, Federal Reserve Bank of San Francisco.
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