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

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Author Info
George A. Kahn

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Abstract

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.

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Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

Volume (Year): (2007)
Issue (Month): Q I ()
Pages: 25-51
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Handle: RePEc:fip:fedker:y:2007:i:qi:p:25-51:n:v.92no.1

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Keywords: Banks and banking; Central;

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Daniel Thornton & David C. Wheelock, 2000. "A history of the asymmetric policy directive," Review, Federal Reserve Bank of St. Louis, issue Sep, pages 1-16. [Downloadable!]
  2. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December. [Downloadable!]
  3. Glenn D. Rudebusch & John C. Williams, 2006. "Revealing the Secrets of the Temple: The Value of Publishing Central Bank Interest Rate Projections," NBER Working Papers 12638, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  4. Gordon H. Sellon, Jr., 2004. "Expectations and the monetary policy transmission mechanism," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 5-41. [Downloadable!]
  5. Alan S. Blinder, 2005. "Monetary Policy by Committee: Why and How?," Working Papers 84, Princeton University, Department of Economics, Center for Economic Policy Studies.. [Downloadable!]
    Other versions:
  6. Charles A.E. Goodhart, 2001. "Monetary transmission lags and the formulation of the policy decision on interest rates," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 165-186. [Downloadable!]
  7. Kenneth N Kuttner, 2004. "A Snapshot of Inflation Targeting in its Adolescence," RBA Annual Conference Volume, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia. [Downloadable!]
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  1. Gordon H. Sellon, Jr., 2008. "Monetary policy transparency and private sector forecasts: evidence from survey data," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 7-34. [Downloadable!]
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