Communicating a policy path: the next frontier in central bank transparency?

In the last two decades, central banks have taken a variety of steps to increase the transparency of monetary policy. Today, many economists are suggesting ways to further increase transparency. One area of considerable interest is the outlook for the future path of the policy rate. The policy rate is the short-term, typically overnight, interest rate that central bankers use to adjust the stance of monetary policy. While central banks typically announce changes in the policy rate when they occur, very few central banks provide an explicit description of where the policy rate is likely to be set in the future. ; Yet, this information is clearly of value to financial markets. Financial market participants want to know the policy path so they can properly price long-term assets, such as government notes and bonds, which depend in part on future short rates. In addition, speculation about the outlook for the policy rate is a staple of the financial press, and futures markets have developed to allow investors to hedge risk or speculate about future policy moves. More information about the policy path might make these markets more efficient and reduce asset price volatility. ; Kahn surveys current central bank practices relating to transparency and the future path of the policy rate. He identifies some of the conceptual and practical issues that may limit central banks' ability and willingness to provide more information about the policy path to financial markets.