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Forward guidance matters: Disentangling monetary policy shocks

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  • Ferreira, Leonardo N.

Abstract

Central banks have usually employed short-term rates as the main instrument of monetary policy. In the last decades, however, forward guidance has also become a central tool. This paper combines two sources of extraneous information - high frequency surprises and narrative evidence - with sign restrictions in a structural vector autoregressive (VAR) model to disentangle forward guidance from conventional monetary policy. Results show that conventional monetary policy has the expected effects on industrial production even in a recent US sample and that forward guidance is an effective policy tool, being at least as strong as conventional monetary policy.

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  • Ferreira, Leonardo N., 2022. "Forward guidance matters: Disentangling monetary policy shocks," Journal of Macroeconomics, Elsevier, vol. 73(C).
    • Handle: RePEc:eee:jmacro:v:73:y:2022:i:c:s0164070422000246
    DOI: 10.1016/j.jmacro.2022.103423
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    More about this item

    Keywords

    Forward guidance; Monetary policy; Narrative sign restrictions; High-frequency identification;
    All these keywords.

    JEL classification:

    • E30 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - General (includes Measurement and Data)
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C50 - Mathematical and Quantitative Methods - - Econometric Modeling - - - General

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