The Dynamic Effects of Forward Guidance Shocks

By Brent Bundick, Economist and A. Lee Smith, Economist

  Download paper, RWP 16-02, January 2016; Revised August 2017

We examine the macroeconomic effects of forward guidance shocks at the zero lower bound. Empirically, we identify forward guidance shocks using unexpected changes in futures contracts around monetary policy announcements. We then embed these policy shocks into a standard vector autoregression to trace out their macroeconomic implications. Forward guidance shocks that lower expected future policy rates lead to significant increases in economic activity and inflation. After examining forward guidance shocks in the data, we show that a standard model of nominal price rigidity can reproduce our empirical findings. To estimate our theoretical model, we generate a model-implied futures curve which closely links our model with the data. Our results suggest no disconnect between the empirical effects of forward guidance shocks and the predictions from a simple theoretical model.

JEL Classification: E32, E52

Article Citation

  • Bundick, Brent, and A. Lee Smith. 2016. “The Dynamic Effects of Forward Guidance Shocks,” Federal Reserve Bank of Kansas City, working paper no. 16-02, January. Available at

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About the Authors


Brent Bundick's research interests include macroeconomics, monetary policy, and computational economics. Read his bio.


Lee Smith’s research focuses on empirical and theoretical studies of monetary policy. Read his bio.