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Can forward guidance be ambiguous yet effective?

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  • Floro, Danvee
  • Tesfaselassie, Mewael F.
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    Abstract

    [Concluding remarks] The financial crisis has rendered conventional monetary policy (of major central banks) powerless. Unconventional monetary policy, in the form of forward guidance and quantitative easing, has taken center stage. Recent moves in financial markets have challenged the notion that forward guidance can be separated from the unwinding of quantitative easing and also shown that forward guidance can have perverse effects on market expectations. Nonetheless, forward guidance, as is currently formulated in practice, may be ineffective in managing market expectations not because central banks are powerless, but because they are too cautious, resulting in ambiguity in policy communication. Vagueness in communication is manifested by the insertion of conditionality and/or by the expression of intent, belief etc., to maintain accommodative policy on a certain course. Setting aside whether caution is warranted or not, the fact is that such vagueness is driven mainly by central banks’ unwavering commitment to price stability, a commitment which is credible owing to their hard-won reputation. Financial markets are aware of this commitment. Saying that, the remark in January 2000 by Ben Bernanke that 'far from being powerless, the Bank of Japan could achieve a great deal if it were willing to abandon its excessive caution,' is still relevant now, as it was back then. --

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    Paper provided by Kiel Institute for the World Economy (IfW) in its series Kiel Policy Brief with number 65.

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    Date of creation: 2013
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    Handle: RePEc:zbw:ifwkpb:65

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    1. Hiroshi Ugai, 2007. "Effects of the Quantitative Easing Policy: A Survey of Empirical Analyses," Monetary and Economic Studies, Institute for Monetary and Economic Studies, Bank of Japan, vol. 25(1), pages 1-48, March.
    2. Joseph Gagnon & Matthew Raskin & Julie Remache & Brian Sack, 2011. "The Financial Market Effects of the Federal Reserve's Large-Scale Asset Purchases," International Journal of Central Banking, International Journal of Central Banking, vol. 7(1), pages 3-43, March.
    3. Shirakawa, Masaaki, 2001. "Monetary Policy Under the Zero Interest Rate Constraint and Balance Sheet Adjustment," International Finance, Wiley Blackwell, vol. 4(3), pages 463-89, Winter.
    4. Arvind Krishnamurthy & Annette Vissing-Jorgensen, 2011. "The Effects of Quantitative Easing on Interest Rates: Channels and Implications for Policy," NBER Working Papers 17555, National Bureau of Economic Research, Inc.
    5. Michael D. Bauer & Glenn D. Rudebusch, 2011. "The signaling channel for Federal Reserve bond purchases," Working Paper Series 2011-21, Federal Reserve Bank of San Francisco.
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    Cited by:
    1. Maria Lucia Florez-Jimenez & Julian A. Parra-Polania, 2014. "Forward guidance with an escape clause: When half a promise is better than a full one," Borradores de Economia 811, Banco de la Republica de Colombia.

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