Monetary Policy Expectations and Economic Fluctuations at the Zero Lower Bound

63 Pages Posted: 17 Aug 2015 Last revised: 8 Jul 2017

See all articles by Rachel Doehr

Rachel Doehr

Claremont McKenna College

Enrique Martínez-García

Federal Reserve Bank of Dallas - Research Department

Multiple version iconThere are 2 versions of this paper

Date Written: May, 2015


We propose a recursive VAR model augmented with survey-based measures of future interest rates to identify the effects of forward guidance on the U.S. economy. Our results show that when interest rates are away from the zero lower bound (ZLB), an exogenous shift in the perception toward higher future interest rates leads to an increase in current economic activity. However, when policy rates fall to the ZLB, economic activity decreases following an upward revision to expected future interest rates. These findings are robust to alternative estimation frameworks, identification schemes and data sources. We also provide a structural interpretation for our findings in the context of the workhorse New Keynesian model with news shocks about future monetary policy (forward guidance). In this setting, the monetary authority cannot accommodate the anticipatory effects from higher future interest rates while at the ZLB, which drags economic activity today. In turn, away from the ZLB, there is policy room to cut rates and revert the negative economic impacts of the anticipated policy. Similarly, announcing future lower interest rates while keeping interest rates at the ZLB today boosts current economic activity while the reverse can happen if, instead, policy rates are lifted above the ZLB to cool down the nascent expansion. Therefore, our empirical results and theoretical insights suggest that managing monetary policy expectations is a useful policy tool for stimulating economic activity, but its transmission mechanism is different at and away from the ZLB.

Keywords: Monetary Policy Transmission Mechanism, Expectations Channel, Expectations-Driven Business Cycles, News Shocks, survey-based forecasts

JEL Classification: E30, E32, E43, E52

Suggested Citation

Doehr, Rachel and Martinez-Garcia, Enrique, Monetary Policy Expectations and Economic Fluctuations at the Zero Lower Bound (May, 2015). Available at SSRN: or

Rachel Doehr (Contact Author)

Claremont McKenna College ( email )

500 E. Ninth Street
Claremont, CA 91711
United States

Enrique Martinez-Garcia

Federal Reserve Bank of Dallas - Research Department ( email )

2200 North Pearl Street
PO Box 655906
Dallas, TX 75265-5906
United States
214-922-5262 (Phone)


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