Comment on “The limits of forward guidance” by Jeffrey R. Campbell, Filippo Ferroni, Jonas D.M. Fisher and Leonardo Melosi

This note discusses the article “The limits of forward guidance” by Jeffrey R. Campbell, Filippo Ferroni, Jonas D. M. Fisher and Leonardo Melosi. The Authors make an excellent contribution to the literature on solving the forward guidance puzzle by proposing that central bank communication is imperfect (noisy) and thus announcements of the monetary policy stance many periods ahead have a limited impact on agents’ decisions. By estimating a rich DSGE model, using a wide set of US data including interest rate futures, they quantify the precision of the Fed’s communication. We show that estimating a linear model without explicitly accounting for the ELB constraint may lead to biased results that overstate the imperfections of central bank communication.(original abstract)