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How Stale Central Bank Interest Rate Projections Affect Interest Rate Uncertainty

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  • Detmers, Gunda-Alexandra
  • Nautz, Dieter
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    Abstract

    The Reserve Bank of New Zealand guides interest rate expectations of financial markets by projections of future short-term rates that are updated only once a quarter. As a consequence, projections become stale when time evolves and new information enters the market. This paper investigates the dynamic impact of probably outdated interest rate projections on the expectations management of central banks. Confirming the stabilizing effect of fresh central bank announcements, we show that interest rate uncertainty increases with the time elapsing since the recent interest rate projection. In contrast, we find that stale projections may hamper central bank communication. In fact, interest rate uncertainty increases when the market perceives the projections to be outdated. --

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    Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order with number 79861.

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    Date of creation: 2013
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    Handle: RePEc:zbw:vfsc13:79861

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    1. 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," NBER Working Papers 13932, National Bureau of Economic Research, Inc.
    2. Alfred V. Guender & Oyvinn Rimer, 2007. "The Implementation of Monetary Policy in New Zealand: What Factors Affect the 90-Day Bank Bill Rate?," Working Papers in Economics 07/05, University of Canterbury, Department of Economics and Finance.
    3. Matthias Neuenkirch, 2010. "Managing Financial Market Expectations: The Role of Central Bank Transparency and Central Bank Communication," MAGKS Papers on Economics, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung) 201028, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    4. 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.
    5. Moessner, Richhild, 2013. "Effects of explicit FOMC policy rate guidance on interest rate expectations," Economics Letters, Elsevier, Elsevier, vol. 121(2), pages 170-173.
    6. 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.
    7. Gunda-Alexandra Detmers & Dieter Nautz, 2011. "The information content of central bank interest rate projections: Evidence from New Zealand," SFB 649 Discussion Papers SFB649DP2011-032, Sonderforschungsbereich 649, Humboldt University, Berlin, Germany.
    8. Michael Ehrmann & David Sondermann, 2012. "The News Content of Macroeconomic Announcements: What if Central Bank Communication Becomes Stale?," International Journal of Central Banking, International Journal of Central Banking, International Journal of Central Banking, vol. 8(3), pages 1-53, September.
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