The Forward Guidance Puzzle

32 Pages Posted: 19 Oct 2012

See all articles by Marco Del Negro

Marco Del Negro

Federal Reserve Bank of New York

Marc P. Giannoni

Federal Reserve Banks - Federal Reserve Bank of Dallas; Center for Economic Policy Research (CEPR)

Christina Patterson

Northwestern University, Department of Economics

Date Written: October 1, 2012

Abstract

With short-term interest rates at the zero lower bound, forward guidance has become a key tool for central bankers, and yet we know little about its effectiveness. Standard medium-scale DSGE models tend to grossly overestimate the impact of forward guidance on the macroeconomy — a phenomenon we call the “forward guidance puzzle.” We explain why this is the case and describe one approach to addressing this issue.

Keywords: forward guidance, DSGE models

JEL Classification: C53, C54, E52

Suggested Citation

Del Negro, Marco and Giannoni, Marc P. and Patterson, Christina, The Forward Guidance Puzzle (October 1, 2012). FRB of New York Staff Report No. 574, Available at SSRN: https://ssrn.com/abstract=2163750 or http://dx.doi.org/10.2139/ssrn.2163750

Marco Del Negro (Contact Author)

Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Marc P. Giannoni

Federal Reserve Banks - Federal Reserve Bank of Dallas ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5291 (Phone)

Center for Economic Policy Research (CEPR)

90-98 Goswell Road
London, EC1V 7RR
United Kingdom

Christina Patterson

Northwestern University, Department of Economics ( email )

2001 Sheridan Road
Evanston, IL 60208
United States

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