The Forward Guidance Puzzle
32 Pages Posted: 19 Oct 2012
Date Written: October 1, 2012
With short-term interest rates at the zero lower bound, forward guidance has become a key tool for central bankers, and yet we know little about its effectiveness. Standard medium-scale DSGE models tend to grossly overestimate the impact of forward guidance on the macroeconomy — a phenomenon we call the “forward guidance puzzle.” We explain why this is the case and describe one approach to addressing this issue.
Keywords: forward guidance, DSGE models
JEL Classification: C53, C54, E52
Suggested Citation: Suggested Citation