Forward Guidance Matters Disentangling Monetary Policy Shocks
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International Spillovers of Forward Guidance Shocks
| Author | : Callum Jones |
| Publisher | : International Monetary Fund |
| Total Pages | : 43 |
| Release | : 2018-05-15 |
| Genre | : Business & Economics |
| ISBN | : 1484353552 |
After 2007, countries that cut their policy interest rates close to zero turned, among other policies, to forward guidance. We estimate a two-country model of the U.S. and Canada to quantify how unexpected changes in U.S. forward guidance affected Canada. Expansionary U.S. forward guidance shocks, like conventional policy shocks, are beggar-thy-neighbor and depress Canadian output, but by twice as much as conventional shocks. We find that the effect of U.S. forward guidance shocks on Canadian output, unlike conventional policy shocks, depends on the state of U.S. demand and can be five times smaller when U.S. demand is weak.
Announcement-specific Decompositions of Unconventional Monetary Policy Shocks and Their Macroeconomic Effects
| Author | : Daniel J. Lewis |
| Publisher | : |
| Total Pages | : |
| Release | : 2019 |
| Genre | : |
| ISBN | : |
I propose to identify announcement-specific decompositions of asset price changes into monetary policy shocks based on intraday time-varying volatility. This approach is the first to accommodate changes in both the nature of shocks and the state of the economy across announcements. I compute daily historical decompositions with respect to three monetary policy shocks for the United States from 2007 to 2018. I derive expressions for the asymptotic variance of such historical decompositions and apply them to assess the statistical significance of notable announcements. Only a handful spark significant shocks, and I discuss the characteristics of those announcements in detail. For many announcements, asset purchase shocks lower corporate borrowing costs, but spreads increase in response to both asset purchases and forward guidance. Turning to the real economy, I find that the asset purchase shock has significant effects on consumer and professional expectations of inflation and GDP growth. I compute dynamic responses of inflation and GDP growth; asset purchases have significant expansionary effects, while fed funds shocks and forward guidance do not.
Limitations on the Effectiveness of Monetary Policy Forward Guidance in the Context of the COVID-19 Pandemic
| Author | : Andrew T. Levin |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 2020 |
| Genre | : |
| ISBN | : |
We examine the effectiveness of forward guidance at the effective lower bound (ELB) in the context of the COVID-19 pandemic. Survey evidence underscores the myopia of professional forecasters at the initial stages of the pandemic and the extraordinary dispersion of their recent forecasts. Moreover, financial markets are now practically certain that U.S. short-term nominal interest rates will remain at the ELB for the next several years; consequently, forward guidance would have to refer to a much longer time horizon than in previous experience. To analyze the effects of these issues, we consider a canonical New-Keynesian model with three modifications: (1) expectations formation incorporates the mechanisms that have been proposed for addressing the forward guidance puzzle; (2) the central bank has imperfect credibility in making longer-horizon commitments regarding the path of monetary policy; and (3) the central bank may not have full knowledge of the true structure of the economy. In this framework, providing substantial near-term monetary stimulus hinges on making promises of relatively extreme overshooting of output and inflation in subsequent years, and hence forward guidance has only tenuous net benefits and may even be counterproductive.
Forward Guidance, Monetary Policy Uncertainty, and the Term Premium
| Author | : Brent Bundick |
| Publisher | : |
| Total Pages | : 35 |
| Release | : 2017 |
| Genre | : |
| ISBN | : |
We examine the macroeconomic and term-premia implications of monetary policy uncertainty shocks. Using Eurodollar options, we employ the VIX methodology to measure implied volatility about future short-term interest rates at various horizons. We identify monetary policy uncertainty shocks using the unexpected changes in this term structure of implied volatility around monetary policy announcements. Two principal components succinctly characterize these changes around policy announcements, which have the interpretation as shocks to the level and slope of the term structure of implied interest rate volatility. We find that an unexpected decline in the slope of implied volatility lowers term premia in longer-term bond yields and leads to higher economic activity and inflation. Our results suggest that forward guidance about future monetary policy can materially affect bond market term premia, even without large scale asset purchases.
The Role of Monetary Policy Uncertainty in Transmitting Monetary Policy Shocks
| Author | : Shan Ying |
| Publisher | : |
| Total Pages | : 0 |
| Release | : 2022 |
| Genre | : |
| ISBN | : |
This paper investigates the role of policy uncertainty associated with Federal Open Market Committee (FOMC) communications plays in transmitting policy shocks. Our measure of monetary policy uncertainty is based on short-term option prices but is orthogonal to the scale of policy shocks. We find evidence to suggest this measure is positively related to the uncertain sentiment in FOMC announcements, to the disagreement on future policy paths among FOMC members and has a lower reading when calendar-based forward guidance is communicated. We find policy uncertainty primarily moderates the impact of forward guidance shocks (Swanson, 2021) on long-term government bond yields. Our results suggest this moderation process is delivered through changes in the term premium component rather than the expected component of yields.
The Limits of Forward Guidance
| Author | : Jeffrey R. Campbell |
| Publisher | : |
| Total Pages | : 41 |
| Release | : 2019 |
| Genre | : Banks and banking, Central |
| ISBN | : |
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.
