Policy Language and Information Effects in the Early Days of Federal Reserve Forward Guidance | Zendy

Kurt G. Lunsford | Zendy

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Policy Language and Information Effects in the Early Days of Federal Reserve Forward Guidance

Author(s) -

Kurt G. Lunsford

Publication year - 2020

Publication title -

american economic review

Language(s) - English

Resource type - Journals

SCImago Journal Rank - 16.936

H-Index - 297

eISSN - 1944-7981

pISSN - 0002-8282

DOI - 10.1257/aer.20181721

Subject(s) - federal funds , economics , monetary policy , forward guidance , open market operation , stock (firearms) , monetary economics , interest rate , unemployment rate , quantitative easing , unemployment , macroeconomics , central bank , credit channel , inflation targeting , mechanical engineering , engineering

I show that the nature of the Federal Open Market Committee's (FOMC's) forward guidance language shapes the private sector's responses to monetary policy statements. From February 2000 to June 2003, the FOMC only gave forward guidance about economic outlook risks, and a decrease in the expected federal funds rate path caused stock prices to fall, GDP growth forecasts to fall, and the unemployment rate to rise. From August 2003 to May 2006, the FOMC added forward guidance about policy inclinations, and a decrease in the expected federal funds rate path had the opposite effects. These results suggest that forward guidance that emphasizes economic outlook risks causes stronger information effects than forward guidance that emphasizes policy inclinations.

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