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The zero-lower bound (ZLB) may constrain the ability of Federal Reserve (Fed) to influence financial markets and the economy. This note examines the effectiveness of the interest rate channel and the credit channel of conventional and unconventional monetary policy while accounting for business cycle fluctuations. We use intraday industry returns and a number of industry-specific and firm-specific indicators to capture the sensitivity of firms' demand to interest rates (interest rate channel) and firms' financial constraints (credit channel). Our results indicate a dramatic change in the effectiveness of the transmission channels across business cycles and across periods. We find that the interest rate channel operates equally well during recessions and expansions pre-ZLB, but that this channel has ceased to function during the ZLB regardless of the stage of the business cycle. In contrast, the credit channel operates only during recessions in the conventional period, while it has been remarkably effective during both recessions and expansions in the ZLB era.1 [ABSTRACT FROM AUTHOR]

Because economic outcomes depend on private-sector expectations, central banks might be tempted to guide these by publishing projections of key macroeconomic variables. We find that optimal projections require misleading the public. Optimal non-misleading projections are time-inconsistent. Non-misleading time-consistent projections can only improve policy outcomes if the public's forecasts are noisier, or inconsistent with implemented policy. Since the public only has incentives to be guided by policymakers' projections when most vulnerable to being mislead, these cannot be trusted blindly. Consistent with this, we find statistically significant systematic deviations between FOMC projections and professional forecasts for US inflation and GDP growth. [ABSTRACT FROM AUTHOR]

This study analyzes the impact of US’s UMP announcements on the Vietnamese stock market during the 2008 GFC and COVID-19 pandemic. Utilizing an event study methodology, it examines both market-wide and sectors-specific stock reactions. The findings reveal overall positive market responses to UMP news in both periods, but with notable differences across industries and crises. During the COVID-19 pandemic, real estate, industrials, materials, and finance sectors exhibited significantly stronger positive reactions compared to the GFC. These sectors maintained positive AARs and CAARs with high statistical significance, suggesting heightened sensitivity to UMP during the pandemic-induced economic downturn. Furthermore, the financial and real estate sectors significantly outperformed their GFC responses during COVID-19, indicating a potential shift in investor sentiment and risk appetite towards these sectors amidst the pandemic's unique economic landscape. This research provides valuable insights into the diverse impacts of UMP across different sectors and crisis contexts.

We examine the effectiveness of the interest rate channel and the credit channel of monetary policy before and after the zero lower bound (ZLB), using intraday stock returns. We construct a number of industry‐specific and firm‐specific indicators to capture the sensitivity of firms' demand to interest rates (interest rate channel) and firms' financial constraints (credit channel). We find that the transmission of monetary policy has shifted across both periods. Conventional monetary policy works through both the neoclassical interest rate channel and the credit channel, while unconventional policy is propagated primarily via the credit channel which became even more effective at the ZLB. Before the ZLB the transmission channels operate primarily through target rate shocks rather than forward guidance announcements, whereas both forward guidance and large scale asset purchases were equally important for the credit channel at the ZLB. We also find strong evidence that transmission channels are asymmetric depending on the state of the stock market (bull/bear, tighter/easier credit conditions, high/low volatility), and the type of policy surprises (positive/negative). Our findings are robust with respect to a number of model extensions and alternative specifications. [ABSTRACT FROM AUTHOR]

We study the incidence and severity of periods with a binding effective lower bound on nominal interest rates and the efficacy of three types of state‐dependent policies—forward guidance about the path of future interest rates, large‐scale asset purchases, and spending‐based fiscal stimulus—in mitigating the detrimental consequences of the lower bound for macro‐economic stability. Based on the ECB's New Area‐Wide Model of the euro area, our findings suggest that, if left unaddressed, the lower bound can cause substantial macro‐economic distortions. In the near term, forward guidance, if fully credible, is most powerful and can largely undo these distortions. A combination of imperfectly credible forward guidance, asset purchases, and fiscal stimulus is almost equally effective, especially when asset purchases enhance the credibility of the forward‐guidance policy via a signaling effect. In the long run, with an equilibrium real rate as low as zero, a combination of all three policies is needed to materially reduce the distortions. [ABSTRACT FROM AUTHOR]

Data from the Consensus Economics Forecast Poll is used to analyse whether Forward Guidance of the ECB affected the accuracy of private sector inflation forecasts. Using more than 4,000 data points our results indicate an improvement of private sector inflation forecasts in terms of accuracy after the change in ECB communication towards Forward Guidance. [ABSTRACT FROM AUTHOR]

We estimate the effects of shocks to interest rate expectations on the four largest euro area economies. We identify these shocks in a Bayesian vector autoregressive (BVAR) model augmented by survey expectations. We separate the expectations shocks from standard monetary policy shocks by assuming that they do not affect the current policy rate. Our sign restrictions also ensure that these shocks do not contain central bank information shocks. We find that an expected decline in the future short‐term rate leads to an increase in output and prices. The increases do not become larger for changes to interest rate expectations further in the future, that is, we do not find evidence of a forward guidance puzzle. Using the multicountry structure of our model, we test for cross‐country differences in the shocks' effects and find output and price effects to be greatest in Germany. We also compare the effects of shocks to interest rate expectations to those of standard monetary policy shocks and show the first type to affect output and prices more strongly in Germany and France. [ABSTRACT FROM AUTHOR]

Summary: How forward guidance influences expectations is not fully understood. To study this, I construct central bank data that includes forward guidance and its attributes, central bank projections, and quantitative easing, which I combine with survey data. I describe how, when, and where forward guidance has worked. I estimate that forecasters revised their interest rate forecasts in the intended direction by five basis points on average following a forward guidance change. I provide estimates for The Federal Reserve, European Central Bank, Bank of England, Bank of Canada, Reserve Bank of Australia, Reserve Bank of New Zealand, Sveriges Riksbank, and Norges Bank. [ABSTRACT FROM AUTHOR]

This paper examines the effectiveness of forward guidance shocks in the US. We estimate a New Keynesian model with imperfect central bank credibility and heterogeneous expectations using Bayesian methods and survey data from the Survey of Professional Forecasters (SPF). The results provide important takeaways: (1) The estimated credibility of the Fed's forward guidance announcements is relatively high, but anticipation effects are attenuated. Accordingly, output and inflation do not respond as favorably as in the fully credible counterfactual. (2) The so-called "forward guidance puzzle" arises partly from the unrealistically large responses of macroeconomic variables to forward guidance under perfect credibility and homogeneous fully informed rational expectations, assumptions which are found to be jointly inconsistent with the observed US data. (3) Imperfect credibility provides a plausible explanation for the empirical evidence of forecasting error predictability based on forecasting disagreement found in the SPF data. Thus, we show that accounting for imperfect credibility and forecasting disagreements is important to understand the formation of expectations and the transmission mechanism of forward guidance. [ABSTRACT FROM AUTHOR]

Housing markets are closely related to monetary policy. This paper studies the link between housing frictions and the effectiveness of forward guidance. A housing collateral constraint and forward guidance shocks are incorporated into a standard medium-scale New Keynesian Dynamic Stochastic General Equilibrium (DSGE) model. Our main results produce a number of important implications. First, financial frictions emanating from the housing market dampen the effectiveness of forward guidance on the economy. Second, forward guidance shocks generate welfare gains, though the magnitude of these gains declines when housing frictions increase. Housing frictions also attenuate the effect of forward guidance at the zero lower bound. Finally, this article provides a solution to "forward guidance puzzle" of Del Negro, M., M. P. Giannoni, and C. Patterson (2012. "The Forward Guidance Puzzle." In FRB of New York Staff Report, 574). Thus, policymakers should consider housing frictions when examining the effects of forward guidance on the economy. [ABSTRACT FROM AUTHOR]

The Federal Open Market Committee's revised Statement on Longer-Run Goals and Monetary Policy Strategy implements flexible average inflation targeting and mitigates shortfalls, rather than deviations, of employment from its maximum level. We show how the Taylor, balanced approach, and balanced approach (shortfalls) rules in the Monetary Policy Report could be modified to be consistent with the revised statement. Federal funds rate prescriptions from the consistent rules are both closer to the liftoff from the effective lower bound in December 2015 and provide a better fit to the actual federal funds rate than the rules currently included in the Report. The prescriptions from the balanced approach rules are closer to the liftoff and provide a better fit than the prescriptions from the Taylor rules. [ABSTRACT FROM AUTHOR]

In August 2020, the Federal Open Market Committee adopted a far-reaching Revised Statement on Longer-Run Goals and Monetary Policy Strategy. The framework contains two major changes from the original 2012 statement. First, policy decisions will attempt to mitigate shortfalls , rather than deviations , of employment from its maximum level. Second, the FOMC will implement Flexible Average Inflation Targeting. We show how to modify the rules in the Fed's Monetary Policy Report to be consistent with the revised statement, how the pattern of falling behind the curve, pivot, and getting back on track in Fed policy during 2021 and 2022 could have been avoided by following inertial rules consistent with either the original or the revised statements, and how current and projected Fed policy for 2023 – 2026 is in accord with the prescriptions from inertial rules. [ABSTRACT FROM AUTHOR]

We demonstrate how the precision of public and private information can be measured and their welfare implications can be assessed. To this end, we develop and apply a procedure to test welfare results from a beauty and nonbeauty contest model based on survey forecasts of interest rates in a large country sample over an extended period of time. In most countries, interest rate forecasts are unbiased. In half of the countries, a higher precision of public information regarding interest rates increases welfare. This applies in particular to small open and emerging market economies. During forward guidance, public information is less precise than private information. On average, forecasters place greater weight on public than private information and rapidly correct errors contained in private information, while errors in public information last over the whole forecast horizon. [ABSTRACT FROM AUTHOR]

This study analyzes the impact of US's UMP announcements on the Vietnamese stock market during the 2008 GFC and COVID-19 pandemic. Utilizing an event study methodology, it examines both market-wide and sectors-specific stock reactions. The findings reveal overall positive market responses to UMP news in both periods, but with notable differences across industries and crises. During the COVID-19 pandemic, real estate, industrials, materials, and finance sectors exhibited significantly stronger positive reactions compared to the GFC. These sectors maintained positive AARs and CAARs with high statistical significance, suggesting heightened sensitivity to UMP during the pandemic-induced economic downturn. Furthermore, the financial and real estate sectors significantly outperformed their GFC responses during COVID-19, indicating a potential shift in investor sentiment and risk appetite towards these sectors amidst the pandemic's unique economic landscape. This research provides valuable insights into the diverse impacts of UMP across different sectors and crisis contexts., Competing Interests: The authors declare the following financial interests/personal relationships which may be considered as potential competing interests:Huyen Nguyen reports was provided by Ho Chi Minh University of Banking. If there are other authors, they declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper., (© 2024 The Authors.)

This paper studies the macroeconomic effects of central bank forward guidance when central bank credibility is endogenous. We take a stylized New Keynesian model with an occasionally binding effective lower bound constraint on nominal interest rates and heterogeneous and boundedly rational households. Central bank forecasts follow a bivariate VAR, not taking into account the time-variation in the distribution of aggregate expectations. In this framework, we extend the central bank's toolkit to allow for the publication of its own forecasts (Delphic guidance) and the commitment to a future path of the nominal interest rate (Odyssean guidance). We find that both Delphic and Odyssean forward guidance increase the likelihood of recovery from a liquidity trap. Even though Odyssean guidance alone appears more powerful in inducing recovery, we find it to increase ex post macroeconomic volatility and thus reduce welfare. [ABSTRACT FROM AUTHOR]

In this study, the US daily economic policy uncertainty (EPU) index is employed to examine how EPU changes because of the implementation of and exit from the unconventional monetary policy adopted by the Federal Open Market Committee (FOMC). The analysis suggests that forward guidance lowers the volatility of EPU. Moreover, the EPU level decreases during the tapering period of quantitative easing. This may be attributable to the unequivocal expected lifting of the zero interest rate policy. In contrast to these findings favoring the FOMC's successful communication, it is found that time‐contingent forward guidance increases EPU. [ABSTRACT FROM AUTHOR]

Abstract This paper investigates the circumstances under which a central bank is more or less likely to deviate from the optimal monetary policy rule. The research question is addressed in a simple New Keynesian dynamic stochastic general equilibrium (DSGE) model in which monetary policy deviations occur endogenously. The model solution suggests that higher future central bank credibility attenuates the current period policy trade-off between a stable inflation rate and a stable output gap. Together with the loss of credibility after a policy deviation, this provides the central bank with an incentive to implement past policy commitments. The result is valid even if the central bank may recover credibility with some probability after a policy deviation. My main finding is that the central bank is willing to implement past policy commitments if a sufficient fraction of agents is not aware of the exact end date of the policy commitment. The result challenges the time-inconsistency argument against monetary policy commitments and provides a potential explanation for the repeated implementation of monetary policy commitments in reality.

This study analyzed the channels responsible for the spillover effect of the US Federal Reserve's (Fed's) forward guidance on China's financial markets with an event study and EGARCH model with data collected over the past decade. The Fed's forward guidance affects China's foreign exchange, bond, stock and money markets. In the three trading days before and after the event, China's foreign exchange market had an instantaneous reaction, the bond and stock market had lagged reactions, and the money market reaction lasted for the full event window. The Fed's forward guidance on China's financial market differs based on the Fed's monetary policy, guidance type and whether the guidance content is adjusted or not. [ABSTRACT FROM AUTHOR]

This article discusses central bank forward guidance as a performative (Austin) and conative (Jakobson) practice – hence, as a form of audience-centred communication that intends to transform their behaviour when deployed by a narrator who is simultaneously also a character in the story. Taking the European Central Bank (ECB) as its primary example, the article conveys how the double role of narrator and character assumed by this institution renders it more permeable to reactions from the markets and the public. As such, ECB forward guidance is frequently misguided, with its communicative imperatives indeed being 'corrected' and 'reoriented' by market actors and publics wishing to perceive the European Central Bank as behaving like an impartial and just frontline hero. While acknowledging the presence of conversational features within these reflexive communication practices, the article approaches forward guidance as an unfolding story, not only due to the relevance of the characterisation processes through which the European Central Bank is repositioned as hero or villain by its publics, but also because exemplary episodes exhibit a reminiscent quality that isolates them from their original context and opens them up to the possibility of re-activation – as indeed happened during the recent Covid-19 pandemic crisis. [ABSTRACT FROM AUTHOR]

This paper evaluates the macroeconomic effects of the European Central Bank's (ECB) forward guidance (FG) in the euro area and analyses its interaction with asset purchases. To that end, we employ a battery of structural vector autoregressions (VARs) with both constant and time-varying parameters and/or the error covariance matrix to explore the propagation of the FG shock over time and account for the changing nature of the ECB's FG. The FG shock is identified via traditional sign and zero restrictions of Arias et al. (Econometrica 86(2): 685–720, 2018), narrative sign restrictions of Antolin-Diaz and Rubio-Ramirez (Am Econ Rev 108(10):2802–2829, 2018) and high-frequency information approach akin to Andrade and Ferroni (J Monet Econ, 2020) and Jarocinski and Karadi (Am Econ J Macroecon 12(2):1–43, 2020). We find that the ECB's forward guidance on interest rates has been an effective policy tool as its announcement causing a 5 bps drop in interest rate expectations increases output by 0.09–0.12% and the price level by 0.035%. In addition, multiple evidence suggests that the introduction of the Asset Purchase Programme (APP) in 2015 considerably enhanced the credibility of FG. Regarding the transmission mechanism, we find that FG significantly lowered uncertainty in the euro area as well as borrowing costs for both households and firms. [ABSTRACT FROM AUTHOR]

In this paper, we estimate the dynamic impact of unconventional monetary policy in the US on international REITs. Unlike existing studies which are limited to conventional policy tools and undertake a static approach, we use an event study approach and estimate a time-varying parameter model to investigate the dynamic impact of forward guidance (FG) and large-scale asset purchases (LSAP) shocks on the international REIT returns. We also compare the effects of these unconventional tools with the effects of conventional federal funds rate (FFR) shocks. The results show that the response of international REITs to unconventional policy shocks depends on the time under consideration. FG shocks have greater time-variation in the impact on REIT returns compared to LSAP shocks, particularly with Australia, Belgium, and the US REIT markets. Furthermore, FG shocks broadly have a negative impact on REITs while the results for LSAP effects are mixed. We also find that in most countries, REITs time-varying response of FG shocks is related to changes in gold prices and financial conditions. [ABSTRACT FROM AUTHOR]

The interest rate is generally considered as an important driver of macroeconomic investment characterised by a particular form of path dependency, “hysteresis”. At the same time, the interest rate channel is a central ingredient of monetary policy transmission. In this context, we shed light on the issue (which currently is a matter of concern for many central banks) whether uncertainty over future interest rates at the zero lower bound hampers monetary policy transmission. As an innovation we derive the exact shape of the “hysteretic” impact of rate changes on macroeconomic investment under different sorts of uncertainty. Starting with hysteresis effects on the micro level, we apply an adequate aggregation procedure to derive the interest rate effects on a macro level. Our results may serve as a guideline for future central banks’ policies on how to stimulate investment in times of low or even zero interest rates and uncertainty. [ABSTRACT FROM AUTHOR]

This paper examines whether central bank communication stabilises euro area inflation expectations through the information and news channel. A novelty of the study is its use of data from Google Analytics on ECB website traffic as proxy for visitors' attention to its communication. We conduct several econometric tests with daily data to measure the impact of ECB communication on the information demand of the public and ultimately on inflation expectations. Overall, this study shows that website attention, as captured by search volumes of visitors, influences euro area inflation expectations. We find that increased website attention contributes to narrowing the gap between market‐based forecasts and (the mean of) longer‐term professional inflation expectations. Our findings add to the theoretical evidence on the existence of an information and news channel. [ABSTRACT FROM AUTHOR]

This paper investigates the circumstances under which a central bank is more or less likely to deviate from the optimal monetary policy rule. The research question is addressed in a simple New Keynesian dynamic stochastic general equilibrium (DSGE) model in which monetary policy deviations occur endogenously. The model solution suggests that higher future central bank credibility attenuates the current period policy trade-off between a stable inflation rate and a stable output gap. Together with the loss of credibility after a policy deviation, this provides the central bank with an incentive to implement past policy commitments. The result is valid even if the central bank may recover credibility with some probability after a policy deviation. My main finding is that the central bank is willing to implement past policy commitments if a sufficient fraction of agents is not aware of the exact end date of the policy commitment. The result challenges the time-inconsistency argument against monetary policy commitments and provides a potential explanation for the repeated implementation of monetary policy commitments in reality. [ABSTRACT FROM AUTHOR]

This paper examines the link between expectations formation and the effectiveness of central bank forward guidance. A standard New Keynesian model is extended to include forward guidance shocks in the monetary policy rule. Agents form expectations about future macro‐economic variables via either the standard rational expectations hypothesis or an adaptive learning model. The results show that the assumption of rational expectations overstates the effects of forward guidance relative to adaptive learning during an economic crisis. Thus, if monetary policy is based on a model with rational expectations, the results of forward guidance could be potentially misleading. [ABSTRACT FROM AUTHOR]

This paper compares market reactions to forecasts of the policy rate path by the Federal Open Market Committee (FOMC) participants with those to forward guidance from the FOMC post‐meeting statements. The forecasts are those by FOMC participants in the quarterly Summary of Economic Projections (SEP; the "dots"). We conduct the analysis during the period when the FOMC's policy rate was at the zero lower bound. We find that market expectations of the time to lift‐off from the zero lower bound are significantly affected in the expected direction by surprises in SEP dots and in forward guidance. We also find a significant impact of macroeconomic news on market participants' expectations of time to lift‐off. These results are consistent with forward guidance about policy rates and SEP forecasts each contributing to the public's understanding of future Federal Reserve monetary policy and with the conditionality of both forms of communication about future policy rates being understood. We also present evidence that market expectations concerning the time to lift‐off are influenced by the maximum time to lift‐off implied by forward guidance, the SEP, and the economic outlook. An appendix provides the FOMC's forward guidance after each meeting from January 2012 to September 2015 and our interpretation of the implied days to lift‐off. [ABSTRACT FROM AUTHOR]

We pursue an empirical strategy to identify a monetary news shock in the U.S. economy. We use a monetary policy residual, along with other variables in a vector autoregression (VAR), and identify a monetary news shock as the linear combination of reduced‐form innovations that is orthogonal to the current residual and that maximizes the sum of contributions to its forecast error variance over a finite horizon. Real GDP declines in a persistent manner after a positive monetary news shock. This contraction in economic activity is accompanied by a fall in inflation and a rapid increase in the nominal interest rate. [ABSTRACT FROM AUTHOR]

Why is a zero lower bound episode long-lasting and disruptive? This paper proposes the interruption of information flow from the central bank's interest rate decision to the private sector as a channel by which the destabilizing effect of the zero lower bound constraint on the nominal interest rate is amplified. This mechanism is incorporated into the new Keynesian model by modifying its information structure. This paper shows that the information loss at the zero lower bound can increase (a) the duration of the zero lower bound episodes and (b) the size of deflation and output gap loss. The result in this paper demonstrates that enhanced information sharing by the central bank about the state of the economy can be effective at alleviating the cost of the zero lower bound. [ABSTRACT FROM AUTHOR]

Using an analytically tractable heterogeneous agent New Keynesian model, we show that whether incomplete markets resolve New Keynesian "paradoxes" depends on the cyclicality of income risk. Incomplete markets reduce the effectiveness of forward guidance and multipliers in a liquidity trap only with procyclical risk. Countercyclical risk amplifies these "puzzles." Procyclical risk permits determinacy under a peg; countercyclical risk may generate indeterminacy even under the Taylor principle. By affecting the cyclicality of risk, even "passive" fiscal policy influences the effects of monetary policy. [ABSTRACT FROM AUTHOR]

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We examine "Forward Guidance Contracts," which penalize central bankers for choosing high interest rates. We integrate those contracts into the New Keynesian Framework and show that they can be used to overcome a liquidity trap. Moreover, although the government takes only a share of the social benefits into account when it has to decide whether to offer the contract, we demonstrate that for plausible parameter values the government will always find it desirable to offer the contract in a liquidity trap but not in normal times. Finally, we show that the optimal duration of such contracts is typically very short. [ABSTRACT FROM AUTHOR]