What are the macroeconomic effects of state-dependent forward guidance?

We examine the macroeconomic effects of the Bank of England (BoE)’s state-dependent forward guidance (SDFG). The policy’s timing permits separate identification of SDFG from QE, which is difficult in the EA and US because these policies were announced jointly. A 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 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. We find that changes in expectations play a greater role in transmitting SDFG to the economy than lower retail interest rates.