# Forward guidance puzzle

Hi

I’m trying to implement a monetary policy news shocks in the NK model of Gali (2008). when implementing the shocks for news 1, 4 and 8 periods ahead based on the literature I should have a high response of the main variables the further ahead is the sock. But in my simulation I’m just getting the same response but delayed.

So I’m wondering why I don’t have the expected response as in the literature ? I attached my code and the main IRF I had

fig1.fig (89.6 KB)

news13.mod (9.2 KB) paranews.m (5.8 KB)

Isn’t the forward guidance puzzle only applicable if you are at the ZLB?

thanks for the answer professor

I know for sure most works on the topic focused on the ZLB periods. To me the puzzle would occur in the model as a basic response to forward guidance appart from the ZLB.
So I used your gali code trying to replicate fig 1, 2 and 3 of this paper of Gali.
Do you have any suggestions?

Thank you
fge_july2019.pdf (328.9 KB)

Why do you think it should occur without the ZLB? It is the initial dynamics at the ZLB that gives forward guidance, i.e. keeping the interest rate low when the economy is already off the ZLB, its power.

Yes I just checked for that and you’re totally right.
So now I’m trying to make the perfect foresight simulation as in your code for the chapter 5 of Gali. I checked the code today but I have no clue on how to add the news shocks. The code without commitment have a Taylor rule. I tried to add equations for the news shocks but it didn’t change the results.
Is it possible to implement a ZLB in the open economy code or the easiest way is to use a model of commitment ?

I am not following. What exactly is it that you are trying to do. Optimal policy in an open economy context with a ZLB?

Hi Professor sorry for the late,

No what I want to do is just to apply a monetary policy news shocks in the context of the ZLB for different period in time to highlight the FGP

It still don’t understand. FG implies that you know the path of interest rates. How does a news shock work?

By supposing that at the end of period T, the central bank announces its intention to commit to a given interest-rate path or alternatively it will maintain the interest rate near the ZLB for some period and then go back to the normal policy rule.
Basically I would like to reproduce the same results as in figure 6 of Del Negro et al

Hi anifab18,

I was wondering if you managed to replicate the figures in Gali’s UIP paper and figure 6 of Del Negro. If possible, could you share the code?
Thank you

Sahil