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The Interest Rate Conditioning Assumption

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  • Charles Goodhart

    (Financial Markets Group, London School of Economics)

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    Abstract

    A central bank’s forecast must contain some assumption about the future path for its own policy-determined short-term interest rate. I discuss the advantages and disadvantages of the three main alternatives: (i) constant from the latest level (ii) as implicitly predicted from the yield curve (iii) chosen by the monetary policy committee (MPC) Most countries initially chose alternative (i). With many central banks having planned to raise interest rates at a measured pace in the years 2004–06, there was a shift to (ii). However, Norway, and now Sweden, has followed New Zealand in adopting (iii), and the United Kingdom has also considered this move. So this is a lively issue.

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    Bibliographic Info

    Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

    Volume (Year): 5 (2009)
    Issue (Month): 2 (June)
    Pages: 85-108

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    Handle: RePEc:ijc:ijcjou:y:2009:q:2:a:3

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    1. Refet Gurkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," Macroeconomics 0504013, EconWPA.
    2. Michael Ehrmann & Marcel Fratzscher, 2007. "Transparency, Disclosure, and the Federal Reserve," International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 179-225, March.
    3. Stephen Morris & Hyun Song Shin & Hui Tong, 2006. "Social Value of Public Information: Morris and Shin (2002) Is Actually Pro-Transparency, Not Con: Reply," American Economic Review, American Economic Association, vol. 96(1), pages 453-455, March.
    4. Carriero, Andrea & Favero, Carlo A. & Kaminska, Iryna, 2006. "Financial factors, macroeconomic information and the Expectations Theory of the term structure of interest rates," Journal of Econometrics, Elsevier, vol. 131(1-2), pages 339-358.
    5. Berg, Claes & Jansson, Per & Vredin, Anders, 2004. "How Useful are Simple Rules for Monetary Policy? The Swedish Experience," Working Paper Series 169, Sveriges Riksbank (Central Bank of Sweden).
    6. Thornton, Daniel-L, 2004. "Testing the Expectations Hypothesis: Some New Evidence for Japan," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 22(2), pages 45-69, May.
    7. Jansson, Per & Vredin, Anders, 2003. "Forecast-Based Monetary Policy: The Case of Sweden," International Finance, Wiley Blackwell, vol. 6(3), pages 349-80, Winter.
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    Cited by:
    1. Tesfaselassie, Mewael F., 2009. "Looking forward: exiting unconventional monetary policy," Open Access Publications from Kiel Institute for the World Economy 32960, Kiel Institute for the World Economy (IfW).
    2. Christian Bustamante & Luis E. Rojas, 2012. "Constant-Interest-Rate Projections and Its Indicator Properties," Borradores de Economia 696, Banco de la Republica de Colombia.
    3. Knüppel, Malte & Schultefrankenfeld, Guido, 2013. "The empirical (ir)relevance of the interest rate assumption for central bank forecasts," Discussion Papers 11/2013, Deutsche Bundesbank, Research Centre.
    4. Peter Tulip & Stephanie Wallace, 2012. "Estimates of Uncertainty around the RBA's Forecasts," RBA Research Discussion Papers rdp2012-07, Reserve Bank of Australia.
    5. Nikola Mirkov & Gisle James Natvik, 2013. "Announcements of interest rate forecasts: Do policymakers stick to them?," Working Paper 2013/11, Norges Bank.
    6. Clemens J.M. Kool & Daniel L. Thornton, 2012. "How effective is central bank forward guidance?," Working Papers 2012-063, Federal Reserve Bank of St. Louis.

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