The Dynamic Effects of Forward Guidance Shocks
Download paper, RWP 16-02, January 2016; Revised June 2019
We examine the macroeconomic eﬀects of forward guidance shocks at the zero lower bound. Empirically, we identify forward guidance shocks using unexpected changes in futures contracts around monetary policy announcements. We then embed these policy shocks in a vector autoregression to trace out their macroeconomic implications. Forward guidance shocks that lower expected future policy rates lead to moderate increases in economic activity and inﬂation. After examining forward guidance shocks in the data, we show that a standard model of nominal price rigidity can reproduce our empirical ﬁndings. To estimate our theoretical model, we generate a model-implied futures curve which closely links our model with the data. Our results suggest no disconnect between the empirical eﬀects of forward guidance shocks around policy announcements and the predictions from a standard theoretical model.
JEL Classification: E32, E52
- Bundick, Brent, and A. Lee Smith. 2016. “The Dynamic Effects of Forward Guidance Shocks,” Federal Reserve Bank of Kansas City, working paper no. 16-02, January. Available at https://doi.org/10.18651/RWP2016-02