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How Effective Is Central Bank Forward Guidance?

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  • Clemens J.M. Kool

    ()

  • Daniel L. Thornton

Abstract

In this paper, we use survey forecasts to investigate the impact of forward guidance on the predictability of future short- and long-term interest rates in four countries: New Zealand, Norway, Sweden, and the United States. New Zealand began providing forward guidance in 1997, Norway in 2005, and Sweden in 2007. The United States had two periods of implicit forward guidance: 2003-2005 and 2008-2011. Overall, we find little or no convincing evidence that forward guidance actually improves markets' ability to forecast future rates or that any improvement in forecasting short-term rates is reflected in longer-term yields. The weak support we do find is at the short end of the yield curve and at relatively short forecast horizons and only for Norway and Sweden. There is no evidence that forward guidance has increased the efficacy of monetary for New Zealand, the country with the longest--15-year--forward guidance history.

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Bibliographic Info

Paper provided by Utrecht School of Economics in its series Working Papers with number 12-05.

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Length: 33 pages
Date of creation: Mar 2012
Date of revision:
Handle: RePEc:use:tkiwps:1205

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Keywords: monetary policy; central bank transparency; interest rates; term structure; forecasting;

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  1. Sharon McCaw & Satish Ranchhod, 2002. "The Reserve Bank's forecasting performance," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 65, December.
  2. Thornton, Daniel L., 2005. "Tests of the expectations hypothesis: Resolving the anomalies when the short-term rate is the federal funds rate," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2541-2556, October.
  3. Hans Gersbach & Volker Hahn, 2008. "Forward Guidance for Monetary Policy: Is It Desirable?," CER-ETH Economics working paper series 08/84, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.
  4. Jane Turner, 2006. "An assessment of recent Reserve Bank forecasts," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 69, pages 6p, September.
  5. Adam Kot & Michal Brzoza-Brzezina, 2008. "The Relativity Theory Revisited: Is Publishing Interest Rate Forecasts Really so Valuable?," National Bank of Poland Working Papers 52, National Bank of Poland, Economic Institute.
  6. Pierre Gosselin, Aileen Lotz and Charles Wyplosz, 2007. "Interest Rate Signals and Central Bank Transparency," IHEID Working Papers 19-2007, Economics Section, The Graduate Institute of International Studies, revised Aug 2007.
  7. Gersbach, Hans & Hahn, Volker, 2008. "Monetary Policy Inclinations," CEPR Discussion Papers 6761, C.E.P.R. Discussion Papers.
  8. Diebold, Francis X & Mariano, Roberto S, 2002. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 20(1), pages 134-44, January.
  9. Menno Middeldorp, 2011. "Central bank transparency, the accuracy of professional forecasts, and interest rate volatility," Staff Reports 496, Federal Reserve Bank of New York.
  10. Giuseppe Ferrero & Alessandro Secchi, 2009. "The Announcement of Monetary Policy Intentions," Temi di discussione (Economic working papers) 720, Bank of Italy, Economic Research and International Relations Area.
  11. Charles Goodhart, 2009. "The Interest Rate Conditioning Assumption," International Journal of Central Banking, International Journal of Central Banking, vol. 5(2), pages 85-108, June.
  12. Pierre Gosselin & Aileen Lotz & Charles Wyplosz, 2006. "How Much Information should Interest Rate-Setting Central Banks Reveal?," IHEID Working Papers 08-2006, Economics Section, The Graduate Institute of International Studies.
  13. Aaron Drew & Özer Karagedikli, 2008. "Some benefits of monetary policy transparency in New Zealand," Reserve Bank of New Zealand Discussion Paper Series DP2008/01, Reserve Bank of New Zealand.
  14. Harvey, David & Leybourne, Stephen & Newbold, Paul, 1997. "Testing the equality of prediction mean squared errors," International Journal of Forecasting, Elsevier, vol. 13(2), pages 281-291, June.
  15. Daniel L. Thornton, 2004. "Tests of the expectations hypothesis: resolving the Campbell-Shiller paradox," Working Papers 2003-022, Federal Reserve Bank of St. Louis.
  16. Daniel L. Thornton, 2003. "Monetary policy transparency: transparent about what?," Manchester School, University of Manchester, vol. 71(5), pages 478-497, 09.
  17. Clemens J. M. Kool & Daniel L. Thornton, 2003. "A note on the expectations hypothesis at the founding of the Fed," Working Papers 2000-004, Federal Reserve Bank of St. Louis.
  18. Clemens Kool & Menno Middeldorp & Stephanie Rosenkranz, 2011. "Central Bank Transparency and the Crowding Out of Private Information in Financial Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(4), pages 765-774, 06.
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