The Forward Guidance Puzzle is not a Puzzle

Gauti B. Eggertsson, Finn D. Schüle

In standard New Keynesian models, future interest rate cuts have larger effects than current cuts--this is called the forward guidance puzzle. We argue that the forward guidance puzzle is not a puzzle. We show the puzzle arises from an implausibly large monetary regime change, exceeding anything in U.S. history since the Great Depression. By calibrating our model to four regime changes during the U.S. Great Depression, disciplined by changes in long-term bond yields, we find the model's predictions are broadly consistent with historical data

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Year of publication:	November 2024
Authors:	Eggertsson, Gauti B. ; Schüle, Finn D.
Institutions:	National Bureau of Economic Research (issuing body)
Publisher:	Cambridge, Mass : National Bureau of Economic Research
Subject:	Geldpolitik \| Monetary policy \| Forward Guidance \| Forward guidance \| USA \| United States