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Central bank policy rate guidance and financial market functioning

  • Richhild Moessner
  • William Nelson
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    Central bank communication has changed dramatically over the past decade, with some central banks providing guidance about or explicit forecasts of likely future policy rates. One frequently made argument against the provision by central banks of such guidance or forecasts is that it runs the risk of impairing market functioning. In this paper, we evaluate the behaviour of financial markets in the United States, the euro area and New Zealand in light of the communication strategies of central banks, in order to assess whether the provision of policy rate guidance by central banks impairs market functioning. While we find evidence that central bank policy rate forecasts influence market prices in New Zealand, we find no evidence that such guidance or forecasts impair market functioning in the United States, the euro area or New Zealand. 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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    Paper provided by Bank for International Settlements in its series BIS Working Papers with number 246.

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    Length: 29 pages
    Date of creation: Feb 2008
    Date of revision:
    Handle: RePEc:bis:biswps:246
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    1. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
    2. Donald L. Kohn & Brian P. Sack, 2003. "Central bank talk: does it matter and why?," Finance and Economics Discussion Series 2003-55, Board of Governors of the Federal Reserve System (U.S.).
    3. Glenn D. Rudebusch & John C. Williams, 2006. "Revealing the Secrets of the Temple: The Value of Publishing Central Bank Interest Rate Projections," NBER Working Papers 12638, National Bureau of Economic Research, Inc.
    4. Eric T. Swanson, 2004. "Federal Reserve transparency and financial market forecasts of short-term interest rates," Finance and Economics Discussion Series 2004-06, Board of Governors of the Federal Reserve System (U.S.).
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