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Forward Guidance and Its Effectiveness: A Macro-Finance Shadow-Rate Framework

Author

Listed:
  • Junko Koeda

    (Graduate School of Economics, Waseda University)

  • Bin Wei

    (Research Department, Federal Reserve Bank of Atlanta)

Abstract

In this paper, we examine the effectiveness of outcome-based forward guidance, a key monetary policy tool that links a central bank’s policy decisions to specific economic outcomes. We develop a novel macro-finance shadow rate term structure model that incorporates unspanned macro factors and an outcome-based liftoff condition. To assess the effectiveness of forward guidance, we propose a novel method that decomposes the shadow rate into components attributable to forward guidance and other unconventional monetary policies. Using maximum likelihood estimation with an extended Kalman filter, we apply the model to both the United States and Japan. Our findings demonstrate that outcome-based forward guidance is effective, delivering significant monetary easing effects on the real economy during both effective lower bound periods of the global financial crisis and the COVID-19 pandemic in the US, as well as during Japan’s era of unconventional monetary policy.

Suggested Citation

  • Junko Koeda & Bin Wei, 2025. "Forward Guidance and Its Effectiveness: A Macro-Finance Shadow-Rate Framework," Working Papers 2423, Waseda University, Faculty of Political Science and Economics.
    • Handle: RePEc:wap:wpaper:2423
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    References listed on IDEAS

    as
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    4. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
    5. Ichiue, Hibiki & Ueno, Yoichi, 2015. "Monetary policy and the yield curve at zero interest," Journal of the Japanese and International Economies, Elsevier, vol. 38(C), pages 1-12.
    6. Kohei Maehashi & Mototsugu Shintani, 2020. "Macroeconomic Forecasting Using Factor Models and Machine Learning: An Application to Japan," CIRJE F-Series CIRJE-F-1146, CIRJE, Faculty of Economics, University of Tokyo.
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    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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