Norges Bank

Working Paper

Unpacking the forward guidance puzzle

SeHyoun Ahn
Working Paper


I prove that in any linearized general equilibrium model with existence and uniqueness of equilibrium, any present response to a future shock always becomes weaker the further away the shock is. There is no forward guidance puzzle in any sensible general equilibrium model if forward guidance is a one-time shock in the future. The difference from the literature arises from the underappreciated preceding peg of interest rate. The standard forward guidance exercise, of a drop in the interest rate in the future with the preceding peg of interest rate, is a series of explosive deviations disguised as a small, one-time shock in the future. I unpack the standard forward guidance exercise in different ways, and show that there is nothing puzzling about the forward guidance puzzle.

Working Papers inneholder forskningsarbeider og utredninger som vanligvis ikke har fått sin endelige form. Også andre faglige analyser fra økonomer i Norges Bank utgis i serien. Synspunkter og konklusjoner i arbeidene står for forfatternes regning.

Norges Bank Working Papers distribueres også gjennom RepEc og BIS Central Bank Research Hub.

ISSN 1502-8190 (online)

Published 30 August 2023 10:45
Published 30 August 2023 10:45