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This implies that monetary policy is generally not hindered in affecting the real economy by the zero lower bound. Moreover, we find that effects are stronger during the period of the global financial crisis, which is particularly true for the FG shock. Our results show that both shocks lead to considerable international effects on output growth, inflation and equity returns. To address potential time variation, we use a fully flexible approach that allows to handle both drifts in residual variances and the structural coefficients. We identify the forward guidance shock via a combination of zero and sign restrictions that use the relationship between expectations and observed data and additionally draw on insights from recent event studies using high‐frequency data. In this paper, we investigate the international effects of euro rate forward guidance (FG) and compare them to spillovers from a conventional monetary policy shock (MP). Thus, we show that accounting for imperfect credibility and forecasting disagreements is important to understand the formation of expectations and the transmission mechanism of forward guidance. (3) Imperfect credibility provides a plausible explanation for the empirical evidence of forecasting error predictability based on forecasting disagreement found in the SPF data. (2) The so-called “forward guidance puzzle” arises partly from the unrealistically large responses of macroeconomic variables to forward guidance under perfect credibility and homogeneous fully informed rational expectations, assumptions which are found to be jointly inconsistent with the observed US data. Accordingly, output and inflation do not respond as favorably as in the fully credible counterfactual. The results provide important takeaways: (1) The estimated credibility of the Fed’s forward guidance announcements is relatively high, but anticipation effects are attenuated. (2016) focus on optimal monetary policy under Odyssean guidance and its.
UFOCUS GUIDANCE FOR THE PUZZLED PDF
We estimate a New Keynesian model with imperfect central bank credibility and heterogeneous expectations using Bayesian methods and survey data from the Survey of Professional Forecasters (SPF). Request PDF The Forward Guidance Puzzle With short-term interest rates at. We organized three focus groups in Raleigh in late 1998, two with current. This paper examines the effectiveness of forward guidance shocks in the US. These insights can be of direct use and provide guidance for survey design.