Staff Reports
The Forward Guidance Puzzle
October 2012  Number 574
Revised May 2013
JEL classification: C53, C54, E52

Authors: Marco Del Negro, Marc Giannoni, and Christina Patterson

With short-term interest rates at the zero lower bound, forward guidance has become a key tool for central bankers, and yet we know little about its effectiveness. Standard medium-scale DSGE models tend to grossly overestimate the impact of forward guidance on the macroeconomy -- a phenomenon we call the “forward guidance puzzle." We explain why this is the case and describe one approach to addressing this issue.

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