DP17555 What are the Macroeconomic Effects of State-Dependent Forward Guidance?
We examine the macroeconomic effects of Bank of England (BoE) state-dependent forward guidance (SDFG). The timing of the BoE’s SDFG permits separate identification of SDFG from QE macroeconomic effects, which is impossible in US and EA data. A standard New Keynesian model shows that SDFG reduces uncertainty about the future policy rate. We use this prediction and the timing of the BoE’s SDFG, to identify SDFG shocks with a narrative sign restriction BVAR, proxy SVAR and local projection approach. Output and prices rise in response to SDFG, despite no econometric restrictions on these variables. The effects are small and consistent with the NK model.