scholarly journals The Dynamic Effects of Forward Guidance Shocks

2020 ◽  
Vol 102 (5) ◽  
pp. 946-965 ◽  
Author(s):  
Brent Bundick ◽  
A. Lee Smith
Keyword(s):  
Monetary Policy ◽  
Theoretical Model ◽  
Economic Activity ◽  
Futures Contracts ◽  
Dynamic Effects ◽  
Forward Guidance ◽  
Policy Shocks ◽  
Macroeconomic Effects ◽  
Future Policy ◽  
Macroeconomic Implications

We examine the macroeconomic effects of forward guidance shocks at the zero lower bound. Empirically, we identify forward guidance shocks using unexpected changes in futures contracts around monetary policy announcements. We then embed these policy shocks in a vector autoregression to trace out their macroeconomic implications. Forward guidance shocks that lower expected future policy rates lead to moderate increases in economic activity and inflation. After examining forward guidance shocks in the data, we show that a standard model of nominal price rigidity can reproduce our empirical findings. To estimate our theoretical model, we generate a model-implied futures curve that closely links our model with the data. Our results suggest no disconnect between the empirical effects of forward guidance shocks around policy announcements and the predictions from a standard theoretical model.

scholarly journals Monetary Policy Surprises, Credit Costs, and Economic Activity

2015 ◽  
Vol 7 (1) ◽  
pp. 44-76 ◽  
Author(s):  
Mark Gertler ◽  
Peter Karadi
Keyword(s):  
Monetary Policy ◽  
High Frequency ◽  
Monetary Policy Shocks ◽  
Var Analysis ◽  
Financial Variables ◽  
Forward Guidance ◽  
Policy Transmission ◽  
Policy Shocks ◽  
Term Premia ◽  
Transmission Of Monetary Policy

We provide evidence on the transmission of monetary policy shocks in a setting with both economic and financial variables. We first show that shocks identified using high frequency surprises around policy announcements as external instruments produce responses in output and inflation that are typical in monetary VAR analysis. We also find, however, that the resulting “modest” movements in short rates lead to “large” movements in credit costs, which are due mainly to the reaction of both term premia and credit spreads. Finally, we show that forward guidance is important to the overall strength of policy transmission. (JEL E31, E32, E43, E44, E52, G01)

scholarly journals Deep habits and the dynamic effects of monetary policy shocks

2010 ◽  
Vol 24 (2) ◽  
pp. 236-258 ◽  
Author(s):  
Morten O. Ravn ◽  
Stephanie Schmitt-Grohė ◽  
Martı´n Uribe ◽  
Lenno Uuskula
Keyword(s):  
Monetary Policy ◽  
Dynamic Effects ◽  
Monetary Policy Shocks ◽  
Policy Shocks

scholarly journals Economic and Monetary Integration in ECOWAS Countries: A Panel VAR Approach to Identify Macroeconomic Shocks

2021 ◽  
Vol 7 (2) ◽  
pp. 61-87
Author(s):  
Asta Ndongo ◽  
Ibrahima Thione Diop
Keyword(s):  
Monetary Policy ◽  
Exchange Rate ◽  
Real Exchange Rate ◽  
Economic Activity ◽  
West African ◽  
The Other ◽  
Panel Var ◽  
Policy Shocks ◽  
Exchange Rate Shocks ◽  
The Impact

This paper studies the impact of output, exchange rate, price, and economic policies (fiscal and monetary) shocks to Economic Community of West African States (ECOWAS) economies over the period 1977-2019. The results of the impulse response functions obtained from the panel VAR show that monetary policy shocks stimulate economic activity, whereas fiscal shocks lead to a contraction. Moreover, these economic policy shocks lead to an increase in the price level. Finally, they have opposite effects on the real exchange rate: a monetary policy shock leads to an appreciation of national currencies against the US dollar, while a fiscal innovation leads to a depreciation of these currencies. As for exchange rate and price shocks, they create inflation and consequently a decline in economic activity. Furthermore, the forecast error variance decomposition reveals that real exchange rate shocks contribute the most to future fluctuations in macroeconomic variables in ECOWAS countries. Moreover, a comparison of the impact on the two currency areas, West African Economic and Monetary Union (WAEMU) and West African Monetary Zone (WAMZ), shows the degree of asymmetry between the two areas. The analysis shows, on the one hand, that shocks are more persistent and significant in the WAMZ and, on the other hand, that except for real exchange rate shocks, the two zones respond asymmetrically to shocks emanating from the other variables.

scholarly journals The ECB, Between Conservatism and Pragmatism

2016 ◽  
Vol 5 (1) ◽  
pp. 25-52 ◽  
Author(s):  
Cécile Bastidon ◽  
Philippe Gilles ◽  
Nicolas Huchet
Keyword(s):  
Monetary Policy ◽  
Economic Activity ◽  
Financial Crises ◽  
Financial Stability ◽  
Banking Sector ◽  
Private Funding ◽  
European Central ◽  
Forward Guidance ◽  
Policy Transmission ◽  
Theoretical Construction

Abstract The 2008 and 2011 crises have durably affected the conditions of monetary policy transmission, particularly in the euro area. However, it is generally considered that the European Central Bank’s (ECB) monetary policy truly became unconventional only at a late stage. Our contribution is threefold. We first show that the notion of “conventional” monetary policy, which is the reference of this assessment, is a recent theoretical construction. Secondly, the mandate of the ECB, which is its institutional expression, may raise specific difficulties in managing major financial crises, particularly with regards to the forward guidance of expectations and the commitment to an accommodative policy. Finally, the resulting policies have, at this stage, paradoxically achieved acceptable levels of macroeconomic and overall financial stability, but failed to restore a private funding supply to the banking sector enabling it to play its normal role in financing economic activity.

scholarly journals Perspectives From the Past for the Federal Reserve’s Monetary Policy and Communication

2018 ◽  
Vol 10 (1) ◽  
pp. 31
Author(s):  
Arto Kovanen
Keyword(s):  
Monetary Policy ◽  
Interest Rate ◽  
Financial Crisis ◽  
Federal Reserve ◽  
Policy Decisions ◽  
Forward Guidance ◽  
Policy Communication ◽  
Communication Practices ◽  
Future Policy ◽  
Future Direction

In this paper we analyze the Federal Reserve’s policy and communication patterns during earlier tightening cycles to gain perspectives into the Federal Reserve’s post-financial crisis monetary policy decisions and communication practices. While each interest rate cycle is unique, as is evident in the post-financial crisis normalization episode, there are regularities that could help inform us about future policy directions. In the post-financial period, the Federal Reserve has placed a great deal of emphasis on policy communication, in particular on its forward guidance, to minimize ambiguity about the future direction of monetary policy. We examine forward guidance during the earlier interest rate cycles and identify some common elements in the Federal Reserve’s communication practices, which would be useful in interpreting the Federal Reserve’s policy actions. This leads us to conclude that it would not be uncharacteristic for the Federal Reserve to suspend its campaign of raising interest rate at this stage of the normalization process, even if inflation risk remains. This underscored the importance of judgment in policy decisions, in part due to uncertainty about the neutral rate of interest, which is a benchmark that the Federal Reserve frequently refers to. In addition, historical trends in economic variables reveal patterns that could assist in evaluating the Federal Reserve’s current and future policy decisions.

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