The Dynamic Effects of Forward Guidance Shocks

By Brent Bundick, Research and Policy Advisor , A. Lee Smith, Research and Policy Advisor

  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

Article Citation

  • 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

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About the Authors


Brent Bundick's research interests include macroeconomics, monetary policy, and computational economics. Read his bio.


Lee Smith’s research focuses on empirical and theoretical studies of monetary policy. Read his bio.