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The Announcement of Monetary Policy Intentions

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Author Info
Giuseppe Ferrero () (Bank of Italy)
Alessandro Secchi () (Bank of Italy)

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Abstract

Whether a central bank should share with the public its views about the future evolution of short term interest rates is an unresolved issue. Disclosing this information might allow a more precise control of market expectations and a more effective achievement of the ultimate goals of the monetary authority. Yet, if the public do not understand the conditional nature of this forecast, it could also undermine the credibility of the central bank. We provide new evidence on the effects of this announcement on private expectations about future short term interest rates. The communication of policy intentions tends to be associated with a greater predictability of monetary policy decisions. Moreover, focussing on New Zealand, where the central bank releases interest rate projections, we find that market expectations react significantly and persistently to the unexpected part of such forecasts. Finally it emerges that the predicted component of the changes in these projections is large, suggesting that market operators understand their conditionality.

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File URL: http://www.bancaditalia.it/pubblicazioni/econo/temidi/td09/td720_09/td_720_09/en_tema_720.pdf
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Publisher Info
Paper provided by Bank of Italy, Economic Research Department in its series Temi di discussione (Economic working papers) with number 720.

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Date of creation: Sep 2009
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Handle: RePEc:bdi:wptemi:td_720_09

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Postal: Via Nazionale, 91 - 00184 Roma
Web page: http://www.bancaditalia.it
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Related research
Keywords: monetary policy; communication; interest rates;

Find related papers by JEL classification:
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates

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  1. Eijffinger, Sylvester C.W. & Geraats, Petra M., 2006. "How transparent are central banks?," European Journal of Political Economy, Elsevier, vol. 22(1), pages 1-21, March. [Downloadable!] (restricted)
    Other versions:
  2. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121. [Downloadable!] (restricted)
    Other versions:
  3. Frederic S Mishkin, 2004. "Can Central Bank Transparency Go Too Far?," RBA Annual Conference Volume, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia. [Downloadable!]
    Other versions:
  4. Bjørn-Roger Wilhelmsen & Andrea Zaghini, 2005. "Monetary policy predictability in the euro area: An international comparison," Working Paper 2005/7, Norges Bank. [Downloadable!]
    Other versions:
  5. Ellis Connolly & Marion Kohler, 2004. "News and Interest Rate Expectations: A Study of Six Central Banks," RBA Annual Conference Volume, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia. [Downloadable!]
    Other versions:
  6. 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!]
  7. Swanson, Eric T., 2006. "Have Increases in Federal Reserve Transparency Improved Private Sector Interest Rate Forecasts?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 791-819, April. [Downloadable!] (restricted)
  8. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June. [Downloadable!] (restricted)
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