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Forward guidance through interest rate projections: does it work?



Based on high-frequency data for Norway and Sweden, we investigate to what extent explicit forward guidance from monetary policy makers, by means of publishing the path of expected future policy rates, affects the market yield curve. We summarise movements in the yield curve by two latent factors (the 'target factor' and 'market path factor'), which capture market participants' assessment of all relevant monetary policy communication made available on announcement days. We then show that information contained in the published interest rate path has a signi cant effect on the market path, and can explain up to 47% of the market path factor. Hence, we conclude that 'explicit' forward guidance in the form of publishing the interest rate path succeeds in moving markets in the desired direction. Furthermore, our results show that central bank and market revisions of interest rate expectations are strongly correlated. This suggests that market participants to a large extent understand the monetary policy reaction pattern.

Suggested Citation

  • Leif Brubakk & Saskia ter Ellen & Hong Xu, 2017. "Forward guidance through interest rate projections: does it work?," Working Paper 2017/6, Norges Bank.
  • Handle: RePEc:bno:worpap:2017_06

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    Cited by:

    1. Sandström, Maria, 2018. "The impact of monetary policy on household borrowing - a high-frequency IV identification," Working Paper Series 351, Sveriges Riksbank (Central Bank of Sweden).
    2. Gunda-Alexandra Detmers & Özer Karagedikli & Richhild Moessner, 2018. "Quantitative or Qualitative Forward Guidance: Does it Matter?," CESifo Working Paper Series 7314, CESifo Group Munich.
    3. Monica Jain & Christopher S. Sutherland, 2018. "How Do Central Bank Projections and Forward Guidance Influence Private-Sector Forecasts?," Staff Working Papers 18-2, Bank of Canada.
    4. repec:bkr:journl:v:77:y:2018:i:4:p:84-106 is not listed on IDEAS
    5. repec:zbw:svrwjg:201718 is not listed on IDEAS
    6. repec:sgh:erfinj:v:4:y:2019:i:1:p:1-26 is not listed on IDEAS

    More about this item


    monetary policy; forward guidance; interest rates;

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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