Abstract
Applying sign restrictions to measures of expectations in a VAR, we quantify the economic effects of imperfectly and perfectly anticipated monetary policy innovations—the type of shocks induced by partially and fully credible forward guidance (FG). We find that fully credible FG one-year ahead has large near-term effects on prices and real activity, but, consistent with the forward guidance puzzle, these effects do not grow much larger as the FG horizon extends into the future. We also estimate that anticipated policy innovations are very noisy. At the one-year horizon, over 70 percent of the monetary-policy signal consists of noise, and the prevalence of noise increases at longer horizons. FG subject to this level of noise would be only partially credible and have significantly smaller macroeconomic effects.
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