The Dynamic Effects of Forward Guidance Shocks
47 Pages Posted: 22 Jan 2016 Last revised: 25 Aug 2017
Date Written: August 1, 2016
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 into a standard vector autoregression to trace out their macroeconomic implications. Forward guidance shocks that lower expected future policy rates lead to significant 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 and the predictions from a simple theoretical model.
Keywords: Forward Guidance, Federal Funds Futures, Zero Lower Bound, Impulse Response Matching
JEL Classification: E32, E52
Suggested Citation: Suggested Citation