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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. Diebold, Francis X. & Li, Canlin, 2003. "Forecasting the term structure of government bond yields," CFS Working Paper Series 2004/09, Center for Financial Studies (CFS).
    2. Carriero, Andrea & Favero, Carlo A & Kaminska, Iryna, 2004. "Financial Factors, Macroeconomic Information and the Expectations Theory of the Term Structure of Interest Rates," CEPR Discussion Papers 4301, C.E.P.R. Discussion Papers.
    3. 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).
    4. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    5. 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.
    6. Ehrmann, Michael & Fratzscher, Marcel, 2005. "Transparency, disclosure and the federal reserve," Working Paper Series 0457, European Central Bank.
    7. 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.
    8. 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. Knüppel, Malte & Schultefrankenfeld, Guido, 2013. "The Empirical (Ir)Relevance of the Interest Rate Assumption for Central Bank Forecasts," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80042, Verein für Socialpolitik / German Economic Association.
    2. Mirkov, Nikola & Natvik, Gisle James, 2013. "Announcements of Interest Rate Forecasts: Do Policymakers Stick to Them?," Working Papers on Finance 1303, University of St. Gallen, School of Finance.
    3. Tesfaselassie, Mewael F., 2009. "Looking forward: Exiting unconventional monetary policy," Kiel Policy Brief 13, Kiel Institute for the World Economy (IfW).
    4. repec:use:tkiwps:1205 is not listed on IDEAS
    5. Christian Bustamante & Luis E. Rojas, 2012. "Constant-Interest-Rate Projections and Its Indicator Properties," BORRADORES DE ECONOMIA 009383, BANCO DE LA REPÚBLICA.
    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.
    7. Peter Tulip & Stephanie Wallace, 2012. "Estimates of Uncertainty around the RBA's Forecasts," RBA Research Discussion Papers rdp2012-07, Reserve Bank of Australia.

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