Research On The Effectiveness Of Fed's Monetary Policy Based On Forward Guidance

Forward guidance is a monetary policy to guide public expectation of future monetary policy stances or policy path changes by issuing forward-looking information such as macroeconomic forecasts or future interest rate paths.Forward guidance,as a tool in the Fed's monetary policy toolkit,was implemented in February 1994 to strengthen guidance on expectations.With the explosion of the global financial crisis in 2008,the Fed sharply lowered the target value of the federal funds rate and entered the zero lower bound period.As the interaction space of conventional monetary policy plummeted,the Fed began to adopt the unconventional use of forward guidance to further keep monetary conditions loose and provide support for economic recovery.On December 16,2015,the Fed raised the target value of the federal funds rate by 0.25% for the first time since June 2006,which marked the end of the U.S.zero lower bound period and the start of the normalization of monetary policy.By December 20,2018,the Fed had raised rates nine times,and cooperated wi th monetary measures such as reducing its balance sheet to promote the normalization of monetary policy process.Therefore,the suitable condition and the effectiveness of monetary policy of the Fed's forward guidance are worth studying.Based on theories of forward guidance and monetary policy effectiveness,this paper takes the real-time data of the Federal Reserve from 2008 to 2017 and the macroeconomic data from 1994 to 2018 as samples,and explores the short-term effectiveness and long-term effectiveness of the Fed's forward guidance by using the event study and establishing vector autoregressive model(VAR).The study found that as the main form of forward guidance,the policy effect of the predictive guidance is very significant during the pre-financial crisis and the post-financial crisis,and the policy effect of the promised guidance that plays a major role during the financial crisis is also quite significant.But in the short term,the effect of forward guidance is diminishing,the last commitment is accidentally goes against the policy objectives;In the long run,there is a lag in the forward guidance's influence on the industrial output index,consumer price index and unemployment rate during certain times,but the impulse response diagram indicates that the three have significant relationship,therefore the policy can effectively curb the decline in output,increase employment,and create moderate inflation expectations.Finally,this paper departs from forward guidance,which is the key tool of the realization of expected management,and puts forward more comprehensive and systematic policy recommendations for the implementation of expected management in China.