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Central Bank Policy Rate Guidance and Financial Market Functioning

  • Richhild Moessner

    (Bank for International Settlements)

  • William R. Nelson

    (Federal Reserve Board)

Registered author(s):

    Several central bankers have expressed concern that providing forecasts of future policy rates may impair financial-market functioning.We look for evidence of such impairment by examining the behavior of financial markets in the United States, the euro area, and New Zealand in light of the communication strategies of the central banks. While we find evidence that central bank policy rate forecasts influence market prices in New Zealand, we find no evidence that market participants in the three regions systematically overweight policy rate guidance or that they do not appreciate the uncertainty and conditionality of it. The results suggest that the risk of impairing market functioning is not a strong argument against central banks’ provision of policy rate guidance or forecasts.

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    Article provided by International Journal of Central Banking in its journal International Journal of Central Banking.

    Volume (Year): 4 (2008)
    Issue (Month): 4 (December)
    Pages: 193-226

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    Handle: RePEc:ijc:ijcjou:y:2008:q:4:a:6
    Contact details of provider: Web page: http://www.ijcb.org/

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    1. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    2. 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.
    3. Gürkaynak, Refet S. & Levin, Andrew & Swanson, Eric T, 2006. "Does Inflation Targeting Anchor Long-Run Inflation Expectations? Evidence from Long-Term Bond Yields in the US, UK and Sweden," CEPR Discussion Papers 5808, C.E.P.R. Discussion Papers.
    4. Ehrmann, Michael & Fratzscher, Marcel, 2004. "Taking stock: monetary policy transmission to equity markets," Working Paper Series 0354, European Central Bank.
    5. Toni Gravelle & Richhild Moessner, 2001. "Reactions of Canadian Interest Rates to Macroeconomic Announcements: Implications for Monetary Policy Transparency," Working Papers 01-5, Bank of Canada.
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