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The Forward Guidance Puzzle

Author

Listed:
  • Marc Giannoni

    (Federal Reserve Bank of New York)

  • Christina Patterson

    (Federal Reserve Bank of New York)

  • 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. This paper first empirically documents the impact of forward guidance announcements on a broad cross section of financial markets data and professional forecasts. We find that FOMC announcements containing forward guidance had heterogeneous effects depending on the other content of the statement. We show that once we control for these other elements, forward guidance had, on average, positive and meaningful effects on output and inflation expectations. Using this benchmark, we then 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.'' We explain why this is the case and show that incorporating a perpetual youth structure into the benchmark provides a possible resolution to the puzzle.

Suggested Citation

  • Marc Giannoni & Christina Patterson & Marco Del Negro, 2016. "The Forward Guidance Puzzle," 2016 Meeting Papers 143, Society for Economic Dynamics.
    • Handle: RePEc:red:sed016:143
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    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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