Analysis on the Influencing Factors of the Effectiveness of Forward Guidance

Economic growth is confronting a downturn despite the low interest rate. Forward Guidance (FG) has been studied and applied to monetary policy for a long time within countries where interest rate is close to the Zero Lower Bound (ZLB). Central banks resorted to FG in practice and have been benefited from the exclusive advantage of it. The paper studies the FG during the period of the Global Financial Crisis (GFC), focusing on the factors that influence the effectiveness of FG and how these factors work in a market mechanism. The research on identified factors challenges the popular proposition that Delphic FG is better off than Odyssean FG. From the transmission channels to the contents of FG, this paper provides an overview of the factors and the mechanisms, as well as recommendations for central banks in terms of the evaluation on the effectiveness of FG. The policy makers are suggested to be more careful when apply FG. Besides, the responses of market agencies should be considered when formulating central bank communication.