Forward Guidance and Expectation Formation : A Narrative Approach

How forward guidance influences expectations is not yet fully understood. To study this issue,I construct central bank data that includes forward guidance and its attributes, central bankprojections, and quantitative easing, which I combine with survey data. I find that, in responseto a change in forward guidance, forecasters revise their interest rate forecasts in theintended direction by five basis points on average. The effect is not attributable to centralbank information effects. Instead, when forming rate expectations, forecasters place fullweight on their own inflation and growth forecasts and zero weight on those of the centralbank