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Quantitative forward guidance and the predictability of monetary policy - A wavelet based jump detection approach -

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  • Lars Winkelmann
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    Abstract

    The publication of a projected path of future policy decisions by central banks is a controversially debated method to improve monetary policy guidance. This paper suggests a new approach to evaluate the impact of the guidance strategy on the predictability of monetary policy. Using the example of Norway, the empirical investigation is based on jump probabilities of interest rates on central bank announcement days before and after the introduction of quantitative guidance. Within the standard semimartingale framework, we propose a new methodology to detect jumps. We derive a representation of the quadratic variation in terms of a wavelet spectrum. An adaptive threshold procedure on wavelet spectrum estimates aims at localizing jumps. Our main empirical result indicates that quantitative guidance significantly improves the predictability of monetary policy.

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    File URL: http://sfb649.wiwi.hu-berlin.de/papers/pdf/SFB649DP2013-016.pdf
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    Bibliographic Info

    Paper provided by Sonderforschungsbereich 649, Humboldt University, Berlin, Germany in its series SFB 649 Discussion Papers with number SFB649DP2013-016.

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    Length: 26 pages
    Date of creation: Apr 2013
    Date of revision:
    Handle: RePEc:hum:wpaper:sfb649dp2013-016

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    Related research

    Keywords: Central bank communication; interest rate projections; semimartingales; Locally Stationary Wavelet processes; jump detection;

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    References

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    1. Gurkaynak, Refet S & Sack, Brian & Swanson, Eric T, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," MPRA Paper 820, University Library of Munich, Germany.
    2. Fan, Jianqing & Wang, Yazhen, 2007. "Multi-Scale Jump and Volatility Analysis for High-Frequency Financial Data," Journal of the American Statistical Association, American Statistical Association, American Statistical Association, vol. 102, pages 1349-1362, December.
    3. repec:taf:jnlbes:v:30:y:2012:i:2:p:242-255 is not listed on IDEAS
    4. Piotr Fryzlewicz & Guy P. Nason, 2006. "Haar-Fisz estimation of evolutionary wavelet spectra," Journal of the Royal Statistical Society Series B, Royal Statistical Society, Royal Statistical Society, vol. 68(4), pages 611-634.
    5. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob de Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," DNB Working Papers, Netherlands Central Bank, Research Department 170, Netherlands Central Bank, Research Department.
    6. Yacine A�t-Sahalia & Jean Jacod, 2012. "Analyzing the Spectrum of Asset Returns: Jump and Volatility Components in High Frequency Data," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 50(4), pages 1007-50, December.
    7. Giuseppe Ferrero & Alessandro Secchi, 2009. "The Announcement of Monetary Policy Intentions," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 720, Bank of Italy, Economic Research and International Relations Area.
    8. Das, Sanjiv R., 2002. "The surprise element: jumps in interest rates," Journal of Econometrics, Elsevier, Elsevier, vol. 106(1), pages 27-65, January.
    9. Frederic S Mishkin, 2004. "Can Central Bank Transparency Go Too Far?," RBA Annual Conference Volume, Reserve Bank of Australia, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.
    10. Richhild Moessner & William R. Nelson, 2008. "Central Bank Policy Rate Guidance and Financial Market Functioning," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 4(4), pages 193-226, December.
    11. Monika Piazzesi, 2005. "Bond Yields and the Federal Reserve," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 113(2), pages 311-344, April.
    12. Richhild Moessner & William Nelson, 2008. "Central bank policy rate guidance and financial market functioning," BIS Working Papers 246, Bank for International Settlements.
    13. G. P. Nason & R. von Sachs & G. Kroisandt, 2000. "Wavelet processes and adaptive estimation of the evolutionary wavelet spectrum," Journal of the Royal Statistical Society Series B, Royal Statistical Society, Royal Statistical Society, vol. 62(2), pages 271-292.
    14. Ana-Maria Dumitru & Giovanni Urga, 2011. "Identifying Jumps in Financial Assets: A Comparison Between Nonparametric Jump Tests," Journal of Business & Economic Statistics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 30(2), pages 242-255, October.
    15. Rainer Von Sachs, 2000. "Non-parametric Curve Estimation by Wavelet Thresholding with Locally Stationary Errors," Scandinavian Journal of Statistics, Danish Society for Theoretical Statistics;Finnish Statistical Society;Norwegian Statistical Association;Swedish Statistical Association, Danish Society for Theoretical Statistics;Finnish Statistical Society;Norwegian Statistical Association;Swedish Statistical Association, vol. 27(3), pages 475-499.
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