Leonardo N. Ferreira , Queen Mary University of London
September 15, 2020
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Central banks have usually employed short-term rates as the main instrument of monetary policy. In the last decades, however, forward guidance has also become a central tool for monetary policy. In an innovative way this paper combines two sources of extraneous information-high frequency surprises and narrative evidence-with sign restrictions in a structural vector autoregressive (VAR) model to fully disentangle the e ects of forward guidance shocks from the e ects of conventional monetary policy shocks. Results show that conventional monetary policy has the expected e ects even in a recent US sample, in contrast with the evidence reported by Barakchian and Crowe (2013) and Ramey (2016), and that forward guidance is an e ective policy tool. In fact, it is at least as strong as conventional monetary policy.
J.E.L classification codes: E30, E32, E43, E52, E58, C11, C50
Keywords:Forward Guidance, Monetary Policy, Narrative Sign Restrictions, High-frequency identification