The Forward Guidance Puzzle

Journal of Political Economy Macroeconomics, 2012

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This paper argues that standard dynamic stochastic general equilibrium models grossly overestimate the impact of forward guidance on the macroeconomy, a phenomenon we call the “forward guidance puzzle.” Using data from a panel of Blue Chip survey expectations, we show that accommodative forward guidance had effects on output and inflation expectations that were positive and nontrivial, but still 28 and 8 times smaller, respectively, than implied by standard models. We show that incorporating a perpetual youth structure into the benchmark provides one possible resolution to the puzzle.

Subfields: Economics and Econometrics

View Paper: https://www.semanticscholar.org/paper/87d93081857bcafc724ff542c1766b4dbf0bc431