Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/200595
Authors: 
Campbell, Jeffrey R.
Ferroni, Filippo
Fisher, Jonas D. M.
Melosi, Leonardo
Year of Publication: 
2019
Series/Report no.: 
Working Paper 2019-03
Abstract: 
The viability of forward guidance as a monetary policy tool depends on the horizon over which it can be communicated and its influence on expectations over that horizon. We develop and estimate a model of imperfect central bank communications and use it to measure how effectively the Fed has managed expectations about future interest rates and the influence of its communications on macroeconomic outcomes. Standard models assume central banks have perfect control over expectations about the policy rate up to an arbitrarily long horizon and this is the source of the so-called "forward guidance puzzle." Our estimated model suggests that the Fed's ability to affect expectations at horizons that are sufficiently long to give rise to the forward guidance puzzle is substantially limited. We also find that imperfect communication has a significant impact on the propagation of forward guidance. Finally, we develop a novel decomposition of the response of the economy to forward guidance and use it to show that empirically plausible imperfect forward guidance has a quantitatively important role bringing forward the effects of future rate changes and that poor communications have been a source of macroeconomic volatility.
Subjects: 
monetary policy
forward guidance puzzle
central bank communication
business cycles
risk management
JEL: 
E0
Persistent Identifier of the first edition: 
Document Type: 
Working Paper
Social Media Mentions:

Files in This Item:
File
Size
509.98 kB





Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.