Using Forecast-Augmented VAR Evidence to Dampen the Forward Guidance Puzzle

21 Pages Posted: 1 Dec 2020

See all articles by Kai Philipp Christoffel

Kai Philipp Christoffel

European Central Bank (ECB)

Oliver Groot

European Central Bank (ECB)

Falk Mazelis

European Central Bank (ECB)

Carlos Montes-Galdón

affiliation not provided to SSRN

Date Written: November, 2020

Abstract

We estimate the effects of interest rate forward guidance (FG) using a parsimonious VAR, augmented with survey forecast data. The identification strategy of FG shocks via sign and zero restrictions is successfully tested by the recovery of true IRFs from simulated data. The identified shocks from the VAR suggest that FG has a stronger effect on macro variables and deviations are more instantaneous compared to the hump-shaped response following unanticipated changes in monetary policy. We apply this evidence to calibrate free parameters of an otherwise estimated DSGE model in order to dampen the FG Puzzle.

JEL Classification: C54, E43, E58

Suggested Citation

Christoffel, Kai Philipp and Groot, Oliver and Mazelis, Falk and Montes-Galdón, Carlos, Using Forecast-Augmented VAR Evidence to Dampen the Forward Guidance Puzzle (November, 2020). ECB Working Paper No. 20202495, Available at SSRN: https://ssrn.com/abstract=3738597

Kai Philipp Christoffel (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Oliver Groot

European Central Bank (ECB)

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Falk Mazelis

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Carlos Montes-Galdón

affiliation not provided to SSRN

No Address Available

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