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The limits of forward guidance

Author

Listed:
  • Jeffrey Campbell

    (Federal Reserve Bank of Chicago)

  • Filippo Ferroni

    (Chicago FED)

  • Jonas Fisher

    (Federal Reserve Bank of Chicago)

  • Leonardo Melosi

    (Federal Reserve Bank of Chicago)

Abstract

Forward guidance allows the Fed to influence private-sector expectations and thereby potentially improve macroeconomic outcomes. This tool's viability depends on the horizon over which the Fed is able to communicate its intentions and its influence on expectations over that horizon. We develop a tractable model of imperfect central bank communications and use it to measure how effectively the Fed has managed private-sector expectations about the future path of the federal funds rate and how its imperfect communications have influenced macroeconomic outcomes. Standard models assume the central bank has perfect control over the private sector's expectations about the policy rate up to an arbitrarily long horizon and this is the source of the so-called ``forward guidance puzzle.'' Our estimated model suggests that the Fed's ability to affect expectations at horizons that are sufficiently long to give rise to the forward guidance puzzle is substantially limited. We also find that imperfect communication has influenced the propagation of forward guidance and is a source of macroeconomic volatility.

Suggested Citation

  • Jeffrey Campbell & Filippo Ferroni & Jonas Fisher & Leonardo Melosi, 2019. "The limits of forward guidance," 2019 Meeting Papers 1109, Society for Economic Dynamics.
  • Handle: RePEc:red:sed019:1109
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    Cited by:

    1. Bassetto, Marco, 2019. "Forward guidance: Communication, commitment, or both?," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 69-86.
    2. William Chen & Gregory Phelan, 2020. "Should Monetary Policy Target Financial Stability?," Department of Economics Working Papers 2020-01, Department of Economics, Williams College.
    3. Bielecki, Marcin & Brzoza-Brzezina, Michał & Kolasa, Marcin, 2019. "Comment on “The limits of forward guidance” by Jeffrey R. Campbell, Filippo Ferroni, Jonas D. M. Fisher and Leonardo Melosi," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 135-139.
    4. Marcin Bielecki & Michał Brzoza-Brzezina & Marcin Kolasa, 2020. "Distributional consequences of conventional and unconventional monetary policy," NBP Working Papers 327, Narodowy Bank Polski, Economic Research Department.
    5. Jeffrey R. Campbell & Thomas B. King & Anna Orlik & Rebecca Zarutskie, 2020. "Issues Regarding the Use of the Policy Rate Tool," Finance and Economics Discussion Series 2020-070, Board of Governors of the Federal Reserve System (U.S.).
    6. Airaudo, Marco, 2020. "Temptation and forward-guidance," Journal of Economic Theory, Elsevier, vol. 186(C).
    7. Eric R. Sims & Jing Cynthia Wu, 2019. "Evaluating Central Banks' Tool Kit: Past, Present, and Future," NBER Working Papers 26040, National Bureau of Economic Research, Inc.
    8. Stephen J. Cole & Enrique Martinez-Garcia, 2019. "The Effect of Central Bank Credibility on Forward Guidance in an Estimated New Keynesian Model," Globalization Institute Working Papers 375, Federal Reserve Bank of Dallas, revised 27 May 2020.

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    • E0 - Macroeconomics and Monetary Economics - - General

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