comment: the dynamic effects of forward guidance shocks...silvia miranda-agrippino bank of england...

Comment: The Dynamic Effects

of Forward Guidance Shocks

Brent Bundick and Andrew Lee Smith

Silvia Miranda-Agrippino

Bank of England

Macroeconomics and Monetary Policy

San Francisco Fed - 4 March 2016

The views expressed are those of the author and do not necessarily reflect those of the Bank of England,the Monetary Policy Committee, the Financial Policy Committee or the Prudential Regulation Authority.

What are the effects of Forward Guidance?

• Di↵erent answers from theoretical and empirical models• Strongly expansionary [Eggerston and Woodford (2003)]• Overrated by theory [Del Negro et al (2012), Kiley (2014)]• Contractionary due to signalling channel [Campbell et al (2012),

Nakamura and Steinsson (2015)]

• This paper:

• High-frequency identification of FG shock at the ZLB

• Standard model with nominal rigidities matches empiricalfindings

• FG induces significant and sustained increase in both outputand prices

Paper Results

#1: VAR Specification

•1Lag, 80% Bands – 5,000 bootstrap samples

0 6 12 18

0

2

4

basis points

Real Consumption

0 6 12 18

0

1

2

PCE Price Index

0 6 12 18−2

−1.5

−1

−0.5

012 Month FFF


•2 Lags

0 6 12 18

0

2

4

basis poin

ts

Real Consumption

0 6 12 18

0

1

2

PCE Price Index

0 6 12 18−2

−1.5

−1

−0.5

012 Month FFF

0 6 12 18−10

−5

0

5

basis poin

ts

Real Consumption

0 6 12 18

0

1

2

PCE Price Index

0 6 12 18−2

−1.5−1

−0.50

12 Month FFF


•3 Lags

0 6 12 18

0

2

4

basis points

Real Consumption

0 6 12 18

0

1

2

PCE Price Index

0 6 12 18−2

−1.5

−1

−0.5

012 Month FFF

0 6 12 18−10

−5

0

5

basis points

Real Consumption

0 6 12 18

0

1

2

PCE Price Index

0 6 12 18−2

−1.5

−1

−0.5

0

12 Month FFF

0 6 12 18−10

−5

0

5

basis points

Real Consumption

0 6 12 18

0

1

2

3PCE Price Index

0 6 12 18−2

−1.5

−1

−0.5

012 Month FFF

#2: QE or FG?

ZLB

QE1

LSAP extended

QE2

Operation Twist

QE3

Taper Tantrum

No Tapering

mid−2013

mid−2015

Daily Change in Rate Expected after 7th FOMC Meeting

2009 2010 2011 2012 2013 2014−0.15

−0.1

−0.05

0

0.05

0.1

External Proxy Identification

#3: Monetary Policy or News?

0 6 12 18 24 30 36 42 48

−3

−2

−1

0

1

Industrial Production

0 6 12 18 24 30 36 42 48

−0.20

0.2

0.4

0.6

0.8Unemployment Rate

0 6 12 18 24 30 36 42 48−2

−1.5

−1

−0.5

0

0.5

CPI All

0 6 12 18 24 30 36 42 48

−5

0

5

CRB Commodity Price Index

0 6 12 18 24 30 36 42 48

−0.5

0

0.5

1

Policy Rate

CHOLPSVARPSVAR*

Proxy SVAR(12) – 1969:2014. CHOL: EFFR ordered last, PSVAR: average market surprise,

PSVAR* proxy orthogonal to CB and private information set [Miranda-Agrippino (2015)]

External Proxy Identification

Alternative Identification

• Forward Guidance part of CB toolset prior to ZLB

• FG shocks are:

1. Orthogonal to changes in the current rate: Path Factor of Gürkaynak, Sack and Swanson (2005)

2. Orthogonal to CB forecasts of output and prices: project onto Greenbook forecasts and forecast revisions

3. Not forecast by the markets: surprise in 30-min window surrounding FOMC announcement

• Builds on Miranda-Agrippino and Ricco (2015)FG Shock Series

Alternative Identification

• Forward Guidance part of CB toolset prior to ZLB

• FG shocks are:1. Orthogonal to changes in the current rate

: Path Factor of Gürkaynak, Sack and Swanson (2005)

2. Orthogonal to CB forecasts of output and prices: project onto Greenbook forecasts and forecast revisions

3. Not forecast by the markets: surprise in 30-min window surrounding FOMC announcement

• Builds on Miranda-Agrippino and Ricco (2015)FG Shock Series

Alternative Identification #1: FG Proxy pre ZLB

• Path Factor orthogonal to Greenbook forecasts for inflationand output for identification from 1993 to 2007

• Use as external instrument: Proxy SVAR

• No QE/ZLB interference: conventional policy sample

• No news interference: orthogonal to CB projections

• Estimate VAR over the ZLB subsample: 2008 to 2014

• Identification Assumptions:1. FG part of CB toolset prior to ZLB2. No break in use of FG over the two subsamples: Potentially

strong one

Alternative Identification #1: FG Proxy pre ZLB

0 6 12 18 24

−8

−6

−4

−2

0basis points

MA Monthly Real GDP

0 6 12 18 24

−15

−10

−5

0Real Consumption

0 6 12 18 24

−2−10

1

2

3GDP Deflator

0 6 12 18 24

−6

−4

−2

0

2

basis points

CF Median 3Mrate Y+1

0 6 12 18 24

−0.8

−0.6

−0.4

−0.2

0CF Disagreement 3Mrate Y+1

0 6 12 18 24−6

−4

−2

0

2

41Year Government Bond Rate

• BVAR(4) with NIW priors – 2008:12 to 2014:12 (ZLB)• Proxy SVAR – 1993:2007, caveat: no B0 uncertainty• CF: Consensus Economics Forecasts• Open issue:

CB forecasts in estimation sample, break in implementation of policy

Alternative Identification #2: Surprise as Proxy

• EFFR after 7th FOMC for identification from 2008 to 2014

• Orthogonal to VAR lags: partial account of news

• No prior cumulation: market surprise

• Use as external instrument: Proxy SVAR

• Estimate VAR over the ZLB subsample: 2008 to 2014

• Identification Assumptions:1. No QE interference: STRONG! Chart

2. No news e↵ect: STRONG! Chart

Alternative Identification #2: Surprise as Proxy

0 6 12 18 24−5

0

5

10

15

20basis points

MA Monthly Real GDP

0 6 12 18 240

20

40

60

80

Core Capital Goods

0 6 12 18 24

0

10

20

Capacity Utilization

0 6 12 18 240

5

10

15

20

basis points

GDP Deflator

0 6 12 18 24

−2

−1.5

−1

−0.5

0

1Year Government Bond Rate

• BVAR(4) with NIW priors – 2008:12 to 2014:12 (ZLB)• Surprise in EFFR after 7th FOMC orthogonal to VAR lags• Proxy SVAR – 2008:12 to 2014:12, caveat: no B0 uncertainty• Open issue:

CB forecasts in estimation sample, no obvious distinction between FG and QE

On Cumulation

Summary

• Very challenging question! Significant step towards providingan answer

• Open Issues:1. Limited sample span : High estimation uncertainty, risks of

model misspecification

2. Break in the implementation of policy : Explicit signalling6= inferring from policy actions

3. MP shocks or macro news : Need to control for CBinformation

4. Unconventional MP : Need to disentangle QE from FG

5. Important nonlinearities at ZLB

Forward Guidance Shock

1991 1993 1995 1997 1999 2001 2003 2005 2007−4

−3

−2

−1

0

1

2

3

4GSS Path FactorFG Shock

back

Cumulated Surprises

[Et

(rt+h)� Et�1(rt+h)]| {z }

Revision of expectation for r

t+h

+ . . .+ [Et+n(rt+n+h)� Et+n�1(rt+n+h)]| {z }Revision of expectation for r

t+n+h

Baseline VAR without cumulation:

0 6 12 18 24 30 36−6

−4

−2

0

2

4

basis points

MA Monthly Real GDP

0 6 12 18 24 30 36−50

−40

−30

−20

−10

0

10

Core Capital Goods

0 6 12 18 24 30 36−10−8−6−4−20

2

4

6

Capacity Utilization

0 6 12 18 24 30 36

0

1

2

3

4

basis points

GDP Deflator

0 6 12 18 24 30 36−2

−1.5

−1

−0.5

0

EFFR 7th FOMC

back

sectionsectionsectionsectionsectionsectionsectionsectionsectionsectionsectionsectionsectionsectionsection

comment: the dynamic effects of forward guidance shocks...silvia miranda-agrippino bank of england...

Documents