The limits of forward guidance

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dc.contributor.authorCAMPBELL, Jeffrey R.
dc.contributor.authorFERRONI, Filippo
dc.contributor.authorFISHER, Jonas D. M.
dc.contributor.authorMELOSI, Leonardo
dc.date.accessioned2020-02-10T16:07:43Z
dc.date.available2020-02-10T16:07:43Z
dc.date.issued2019
dc.descriptionAvailable online 15 August 2019en
dc.description.abstractThe viability of forward guidance as a monetary policy tool depends on the horizon over which it can be communicated and its influence on expectations over that horizon. This paper develops and estimates a model of imperfect central bank communications and uses it to measure how effectively the Fed has managed expectations about future interest rates and the influence of its communications on macroeconomic outcomes. Standard models assume central banks have perfect control over 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 has limited ability to affect expectations at horizons that are sufficiently long to give rise to the forward guidance puzzle. Additionally, imperfect communication has a significant impact on the propagation of forward guidance. Finally, we develop a novel decomposition of the response of the economy to forward guidance. The decomposition shows that empirically plausible imperfect forward guidance has a quantitatively important role bringing forward the effects of future rate changes and that poor communications have been a source of macroeconomic volatility. (C) 2019 Elsevier B.V. All rights reserved.en
dc.identifier.citationJournal of monetary economics, 2019, Vol. 108, (SI), pp. 118-134en
dc.identifier.doi10.1016/j.jmoneco.2019.08.009
dc.identifier.endpage134
dc.identifier.issn0304-3932
dc.identifier.issn1873-1295
dc.identifier.startpage118
dc.identifier.urihttps://hdl.handle.net/1814/66019
dc.identifier.volume108
dc.language.isoen
dc.publisherElsevieren
dc.relation.ispartofJournal of monetary economicsen
dc.subjectMonetary policyen
dc.subjectForward guidance puzzleen
dc.subjectCentral bank communicationen
dc.subjectBusiness cyclesen
dc.subjectRisk managementen
dc.titleThe limits of forward guidanceen
dc.typeArticle
dspace.entity.typePublication
eui.subscribe.skiptrue
person.identifier.orcid0009-0001-0450-3284
person.identifier.other42866
relation.isAuthorOfPublication518f09bc-c1a0-4faa-a2bc-dbfe419e2076
relation.isAuthorOfPublication.latestForDiscovery518f09bc-c1a0-4faa-a2bc-dbfe419e2076
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