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Forward Guidance and Its Effectiveness: A Macro-Finance Shadow-Rate Framework

Author

Listed:
  • Junko Koeda

    (Graduate School of Economics, Waseda University)

  • Bin Wei

    (Research Department, Federal Reserve Bank of Atlanta)

Abstract

In this paper, we examine the effectiveness of outcome-based forward guidance, a key monetary policy tool that links a central bank’s policy decisions to specific economic outcomes. We develop a novel macro-finance shadow rate term structure model that incorporates unspanned macro factors and an outcome-based liftoff condition. To assess the effectiveness of forward guidance, we propose a novel method that decomposes the shadow rate into components attributable to forward guidance and other unconventional monetary policies. Using maximum likelihood estimation with an extended Kalman filter, we apply the model to both the United States and Japan. Our findings demonstrate that outcome-based forward guidance is effective, delivering significant monetary easing effects on the real economy during both effective lower bound periods of the global financial crisis and the COVID-19 pandemic in the US, as well as during Japan’s era of unconventional monetary policy.

Suggested Citation

  • Junko Koeda & Bin Wei, 2025. "Forward Guidance and Its Effectiveness: A Macro-Finance Shadow-Rate Framework," Working Papers 2423, Waseda University, Faculty of Political Science and Economics.
    • Handle: RePEc:wap:wpaper:2423
    as

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    References listed on IDEAS

    as
    1. Scott Joslin & Kenneth J. Singleton & Haoxiang Zhu, 2011. "A New Perspective on Gaussian Dynamic Term Structure Models," The Review of Financial Studies, Society for Financial Studies, vol. 24(3), pages 926-970.
    2. Maehashi, Kohei & Shintani, Mototsugu, 2020. "Macroeconomic forecasting using factor models and machine learning: an application to Japan," Journal of the Japanese and International Economies, Elsevier, vol. 58(C).
    3. Ang, Andrew & Piazzesi, Monika, 2003. "A no-arbitrage vector autoregression of term structure dynamics with macroeconomic and latent variables," Journal of Monetary Economics, Elsevier, vol. 50(4), pages 745-787, May.
    4. Ang, Andrew & Piazzesi, Monika & Wei, Min, 2006. "What does the yield curve tell us about GDP growth?," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 359-403.
    5. Ichiue, Hibiki & Ueno, Yoichi, 2015. "Monetary policy and the yield curve at zero interest," Journal of the Japanese and International Economies, Elsevier, vol. 38(C), pages 1-12.
    6. Kohei Maehashi & Mototsugu Shintani, 2020. "Macroeconomic Forecasting Using Factor Models and Machine Learning: An Application to Japan," CIRJE F-Series CIRJE-F-1146, CIRJE, Faculty of Economics, University of Tokyo.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    forward guidance; effective lower bound (ELB); liftoff; term structure; shadow rate; macro finance; unspanned macro factors;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • 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

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