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Forward Guidance and Asset Prices

Author

Listed:
  • Yıldız Akkaya

    (Bilkent University (E-mail: yakkaya@bilkent.edu.tr))

  • Refet S. Gürkaynak

    (Bilkent University and CEPR (E-mail: refet@bilkent.edu.tr))

  • Burçin Kısacıkoğlu

    (Johns Hopkins University (E-mail: bkisaci1@jhu.edu))

  • Jonathan H. Wright

    (Johns Hopkins University (E-mail: wrightj@jhu.edu))

Abstract

This paper examines the effects of forward guidance at the zero lower bound on the term structure of interest rates in a shadow-rate macro-finance term structure model. The effects on the yield curve are found to depend on the type of forward guidance and on the current level of the shadow rate. The more negative the shadow rate, and so the further away liftoff is, the less effective is forward guidance. Forward guidance affects both the expected path of future short rates, but also term premia. Our model allows us to estimate these effects separately. We also conduct an event-study in which we break out FOMC announcements into surprises concerning the future path of the funds rate, and uncertainty around that path, and then estimate the impacts of each on equity and currency markets.

Suggested Citation

  • Yıldız Akkaya & Refet S. Gürkaynak & Burçin Kısacıkoğlu & Jonathan H. Wright, 2015. "Forward Guidance and Asset Prices," IMES Discussion Paper Series 15-E-06, Institute for Monetary and Economic Studies, Bank of Japan.
    • Handle: RePEc:ime:imedps:15-e-06
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    File URL: http://www.imes.boj.or.jp/research/papers/english/15-E-06.pdf
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    References listed on IDEAS

    as
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    2. Eric T. Swanson & John C. Williams, 2014. "Measuring the Effect of the Zero Lower Bound on Medium- and Longer-Term Interest Rates," American Economic Review, American Economic Association, vol. 104(10), pages 3154-3185, October.
    3. Black, Fischer, 1995. "Interest Rates as Options," Journal of Finance, American Finance Association, vol. 50(5), pages 1371-1376, December.
    4. Jeffrey R. Campbell & Charles L. Evans & Jonas D.M. Fisher & Alejandro Justiniano, 2012. "Macroeconomic Effects of Federal Reserve Forward Guidance," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 43(1 (Spring), pages 1-80.
    5. Andrew Ang & Jean Boivin & Sen Dong & Rudy Loo-Kung, 2011. "Monetary Policy Shifts and the Term Structure," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 78(2), pages 429-457.
    6. Marco Del Negro & Marc P. Giannoni & Christina Patterson, 2023. "The Forward Guidance Puzzle," Journal of Political Economy Macroeconomics, University of Chicago Press, vol. 1(1), pages 43-79.
    7. Gauti B. Eggertsson & Michael Woodford, 2003. "The Zero Bound on Interest Rates and Optimal Monetary Policy," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 34(1), pages 139-235.
    8. Andrew Filardo & Boris Hofmann, 2014. "Forward guidance at the zero lower bound," BIS Quarterly Review, Bank for International Settlements, March.
    9. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-491, June.
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    Citations

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    Cited by:

    1. Martin Kliem & Alexander Meyer‐Gohde, 2022. "(Un)expected monetary policy shocks and term premia," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 37(3), pages 477-499, April.
    2. Pagliari, Maria Sole, 2024. "Does one (unconventional) size fit all? Effects of the ECB’s unconventional monetary policies on the euro area economies," European Economic Review, Elsevier, vol. 168(C).
    3. Christiaan Pattipeilohy & Christina Bräuning & Jan Willem van den End & Renske Maas, 2017. "Assessing the effective stance of monetary policy: A factor-based approach," DNB Working Papers 575, Netherlands Central Bank, Research Department.
    4. Lemke, Wolfgang & Vladu, Andreea L., 2016. "Below the zero lower bound: A shadow-rate term structure model for the euro area," Discussion Papers 32/2016, Deutsche Bundesbank.
    5. Husted, Lucas & Rogers, John & Sun, Bo, 2020. "Monetary policy uncertainty," Journal of Monetary Economics, Elsevier, vol. 115(C), pages 20-36.
    6. repec:hum:wpaper:sfb649dp2017-015 is not listed on IDEAS
    7. Yushi Endo & Takushi Kurozumi & Takemasa Oda & Kenichirou Watanabe, 2015. "Monetary Policy: Its Effects and Implementation: Summary of the 2015 BOJ-IMES Conference Organized by the Institute for Monetary and Economic Studies of the Bank of Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 33, pages 1-24, November.

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    More about this item

    Keywords

    Forward guidance; zero lower bound; term structure; event study;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • 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

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