Forward Guidance and Its Effectiveness: A Macro Finance Shadow-Rate Framework
Abstract: Forward guidance provides monetary policy communication for an economy at the effective lower bound (ELB). In this paper, we consider both calendar- and outcome-based forward guidance about the timing of liftoff. We develop a novel macro-finance shadow rate term structure model by introducing unspanned macro factors and an outcome-based liftoff condition. We estimate the model using the maximum likelihood method with extended Kalman filter. Based on the estimation results, we show that outcome-based forward guidance is indeed effective and has significant monetary-easing effects on the real economy in both ELB periods of the global financial crisis (GFC) and the COVID-19 pandemic. In particular, we find that the overall impact on the unemployment rate is about 0.8 percent during both the GFC and the pandemic, but outcome-based forward guidance contributes more in the former than in the latter ELB period (about 0.30 percent versus 0.15 percent).
Status: Published in 2023
File(s): File format is application/pdf https://www.atlantafed.org/-/media/documents/research/publications/wp/2023/10/16/16--forward-guidance-and-its-effectiveness--macro-finance-shadow-framework.pdf
Provider: Federal Reserve Bank of Atlanta
Part of Series: FRB Atlanta Working Paper
Publication Date: 2023-10-16