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How Effective Is Central Bank Forward Guidance?

Author

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  • Clemens J. M. Kool
  • Daniel L. Thornton

Abstract

This paper investigates the effectiveness of forward guidance for the central banks of New Zealand, Norway, Sweden, and the United States. The authors test whether forward guidance improved market participants? ability to forecast future short-term and long-term rates relative to several benchmarks. They find some evidence that forward guidance improved market participants? ability to forecast short-term rates over relatively short forecast horizons for New Zealand, Norway, and Sweden but not the United States. However, the effects are typically small and frequently not statistically significant. Moreover, in no case are the results uniform across the benchmarks used. In addition, the authors find evidence of convergence of survey forecasters for New Zealand but less so for the other countries and no evidence of convergence for the United States.

Suggested Citation

  • Clemens J. M. Kool & Daniel L. Thornton, 2015. "How Effective Is Central Bank Forward Guidance?," Review, Federal Reserve Bank of St. Louis, vol. 97(4), pages 303-322.
  • Handle: RePEc:fip:fedlrv:00049
    DOI: 10.20955/r.2015.303-22
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    File URL: http://dx.doi.org/10.20955/r.2015.303-22
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    References listed on IDEAS

    as
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    3. Brzoza-Brzezina, Michal & Kot, Adam, 2008. "The Relativity Theory Revisited: Is Publishing Interest Rate Forecasts Really so Valuable?," MPRA Paper 10296, University Library of Munich, Germany.
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    5. Pierre Gosselin & Aileen Lotz & Charles Wyplosz, 2009. "Interest Rate Signals and Central Bank Transparency," NBER Chapters, in: NBER International Seminar on Macroeconomics 2007, pages 9-51, National Bureau of Economic Research, Inc.
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    7. Menno Middeldorp & Stephanie Rosenkranz, 2011. "Central bank transparency and the crowding out of private information in an experimental asset market," Staff Reports 487, Federal Reserve Bank of New York.
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    9. Aron Drew & Özer Karagedikli, 2007. "Some Benefits of Monetary-Policy Transparency in New Zealand," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 57(11-12), pages 521-539, December.
    10. 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.
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    12. Daniel L. Thornton, 2003. "Monetary policy transparency: transparent about what?," Manchester School, University of Manchester, vol. 71(5), pages 478-497, September.
    13. Carl E. Walsh, 2007. "Optimal Economic Transparency," International Journal of Central Banking, International Journal of Central Banking, vol. 3(1), pages 5-36, March.
    14. 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.
    15. Lars E. O. Svensson, 2006. "Social Value of Public Information: Comment: Morris and Shin (2002) Is Actually Pro-Transparency, Not Con," American Economic Review, American Economic Association, vol. 96(1), pages 448-452, March.
    16. Daniel L. Thornton, 2014. "The identification of the response of interest rates to monetary policy actions using market-based measures of monetary policy shocks," Oxford Economic Papers, Oxford University Press, vol. 66(1), pages 67-87, January.
    17. Richhild Moessner, 2013. "Effects of explicit FOMC policy rate guidance on market interest rates," DNB Working Papers 384, Netherlands Central Bank, Research Department.
    18. Moessner, Richhild, 2013. "Effects of explicit FOMC policy rate guidance on interest rate expectations," Economics Letters, Elsevier, vol. 121(2), pages 170-173.
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    Citations

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    Cited by:

    1. Jitmaneeroj, Boonlert & Lamla, Michael J. & Wood, Andrew, 2019. "The implications of central bank transparency for uncertainty and disagreement," Journal of International Money and Finance, Elsevier, vol. 90(C), pages 222-240.
    2. Rybacki, Jakub, 2019. "Forward Guidance and the private forecast disagreement – case of Poland," MPRA Paper 94465, University Library of Munich, Germany.
    3. Proaño, Christian R. & Lojak, Benjamin, 2020. "Animal spirits, risk premia and monetary policy at the zero lower bound," Journal of Economic Behavior & Organization, Elsevier, vol. 171(C), pages 221-233.
    4. Ryan Rholes & Luba Petersen, 2020. "Should central banks communicate uncertainty in their projections?," Discussion Papers dp20-01, Department of Economics, Simon Fraser University.
    5. Guidolin, Massimo & Thornton, Daniel L., 2018. "Predictions of short-term rates and the expectations hypothesis," International Journal of Forecasting, Elsevier, vol. 34(4), pages 636-664.

    More about this item

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications

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