Working Paper: CEPR ID: DP17555
Authors: Tomasz Wieladek; Martin Weale
Abstract: We examine the macroeconomic effects of Bank of England (BoE) state-dependent forward guidance (SDFG). The timing of the BoE’s SDFG permits separate identification of SDFG from QE macroeconomic effects, which is impossible in US and EA data. A standard New Keynesian model shows that SDFG reduces uncertainty about the future policy rate. We use this prediction and the timing of the BoE’s SDFG, to identify SDFG shocks with a narrative sign restriction BVAR, proxy SVAR and local projection approach. Output and prices rise in response to SDFG, despite no econometric restrictions on these variables. The effects are small and consistent with the NK model.
Keywords: monetary policy; state-dependent forward guidance; inflation expectations
JEL Codes: E52; E58; E31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| SDFG (Y60) | output (C67) |
| SDFG (Y60) | prices (P22) |
| SDFG (Y60) | short-term mortgage rates (G21) |
| SDFG (Y60) | expectations about future economic activity (D84) |
| SDFG (Y60) | long-term inflation expectations (E31) |
| QE (E01) | output (C67) |
| QE (E01) | prices (P22) |