Forward guidance matters: Disentangling monetary policy shocks

Central banks have usually employed short-term rates as the main instrument of moneta r y policy. In the last decades, however, forward guidance has also become a central tool . This paper combines two sources of extraneous information -high frequency surprises and narrative evidence -with sign restrictions in a structural vector autoregressive (VAR) model to disentangle forward guidance from conventional moneta r y policy. Results show that conventional moneta r y policy has the expected effects on industrial production even in a recent US sample and that forward guidance is an effective policy tool , being at least as strong as conventional moneta r y policy.