Forward Guidance and Macroeconomic Outcomes since the Financial Crisis

Abstract

Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Abstract This paper studies the effects of FOMC forward guidance. We begin by using high frequency identification and direct measures of FOMC private information to show that puzzling responses of private sector forecasts to movements in federal funds futures rates on FOMC announcement days can be attributed entirely to Delphic forward guidance. However a large fraction of futures rates' variability on announcement days remains unexplained, leaving open the possibility that the FOMC has successfully communicated Odyssean guidance. We then examine whether the FOMC used Odyssean guidance to improve macroeconomic outcomes since the financial crisis. To this end we use an estimated medium-scale New Keynesian model to perform a counterfactual experiment for the period 2009q1-2014q4, in which we assume the FOMC did not employ any Odyssean guidance and instead followed its reaction function from before the crisis as closely as possible while respecting the effective lower bound. We find that a purely rule-based policy would have delivered better outcomes in the years immediately following the crisis than FOMC forward guidance did in practice. However starting toward the end of 2011, after the Fed's introduction of "calendar-based" communications, the FOMC's Odyssean guidance appears to have boosted real activity and moved inflation closer to target. We show that our results do not reflect Del Negro, Giannoni, and Patterson (2015)'s forward guidance puzzle. JEL Codes: E0. Terms of use: Documents in

Identification of Monetary Policy Shocks with External Instrument SVAR

“…Also, we find that a contractionary forward guidance shock results in an increase, not a decrease, of future output and price level, and has little instant impact on either of them. This outcome is consistent with the idea that forward guidance reveals information about expected future paths of the economy (for example, see Campbell et al (2012), Campbell et al (2016, and Nakamura and Steinsson (2013)), rather than changes in future policy stance. For forward guidance, the impact of revealed information seems to dominate the impact of revealed future policy stance.…”

The Time-Varying Effect of Monetary Policy on Asset Prices

“…In this regard, the method is closely related to the external instrument or proxy SVAR approach, introduced by Stock and Wat-2 See also Campbell et al (2012Campbell et al ( , 2017 and Miranda-Agrippino and Ricco (2017) for empirical evidence. 3 For the same reason, I focus on regular FOMC meetings and do not include unscheduled FOMC meetings.…”

Monetary Policy Transmission in an Open Economy: New Data and Evidence from the United Kingdom

“…This evidence is relevant to improve our under-32 See, for example, Gertler and Karadi (2015), Ramey (2016), Campbell et al (2016), Vicondoa (2016), Miranda-Agrippino (2016. 33 We first replicated Gertler and Karadi (2015) baseline VAR (i.e., Figure 1 in their paper) using the data available at https://www.aeaweb.org/aej/mac/data/0701/2013-0329 data.zip.…”