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The Forward Guidance Puzzle

Author

Listed:
  • Marc Giannoni

    (Federal Reserve Bank of New York)

  • Christina Patterson

    (MIT)

  • Marco Del Negro

    (Federal Reserve Bank of New York)

Abstract

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. We show that 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," and explain why this is the case. We document the impact of forward guidance announcements on 1) a broad cross section of financial markets data, and 2) on the panel of Blue Chip forecasts. We find that this effect has been very heterogeneous across announcements and relate this heterogeneity to the type of forward guidance, whether delphic (news about the economy) or odyssean. We also discuss various explanations to the puzzle that have been advanced in the literature.

Suggested Citation

  • Marc Giannoni & Christina Patterson & Marco Del Negro, 2015. "The Forward Guidance Puzzle," 2015 Meeting Papers 1529, Society for Economic Dynamics.
    • Handle: RePEc:red:sed015:1529
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    References listed on IDEAS

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    1. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 42(2 (Fall)), pages 215-287.
    2. Michael D. Bauer & Glenn D. Rudebusch, 2014. "The Signaling Channel for Federal Reserve Bond Purchases," International Journal of Central Banking, International Journal of Central Banking, vol. 10(3), pages 233-289, September.
    3. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    4. Frank Smets & Rafael Wouters, 2007. "Shocks and Frictions in US Business Cycles: A Bayesian DSGE Approach," American Economic Review, American Economic Association, vol. 97(3), pages 586-606, June.
    5. 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.
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    More about this item

    JEL classification:

    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy

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