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Forward Guidance

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  • Svensson, Lars E O

Abstract

Forward guidance about future policy settings, in the form of a published policy-rate path, has for many years been a natural part of normal monetary policy for several central banks, including the Reserve Bank of New Zealand and the Swedish Riksbank. More recently, the Federal Reserve has started to publish FOMC participants’ policy-rate projections. The Swedish, New Zealand, and U.S. experience of a published policy-rate path is examined, especially to what extent the market has anticipated the path (the predictability of the path) and to what extent market expectations line up with the path after publication (the credibility of the path). The recent Swedish experience is quite dramatic. In particular, it shows a case with a large discrepancy between a high and rising Riksbank path and a low and falling market path, with the market path providing a good forecast of the future policy rate. The discrepancy is explained by the Riksbank’s leaning against the wind in recent years and related circumstances. The New Zealand experience is less dramatic, but shows cases where the market implements either a substantially tighter or easier policy than intended by the RBNZ. There are also cases of the market being ahead of the RBNZ and the RBNZ later following the market. The U.S. experience includes a recent case of the market expecting and implementing substantially easier policy consistent with the FOMC projections, the possible explanation of which has been much discussed.

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  • Svensson, Lars E O, 2015. "Forward Guidance," CEPR Discussion Papers 10669, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10669
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    References listed on IDEAS

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    8. William Dudley, 2015. "Remarks at the 2015 U.S. Monetary Policy Forum," Speech 157, Federal Reserve Bank of New York.
    9. Lars E.O. Svensson, 2016. "Inflation Targeting and "Leaning Against the Wind"," Israel Economic Review, Bank of Israel, vol. 13(1), pages 91-99.
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    13. Woodford, Michael, 2013. "Forward Guidance by Inflation-Targeting Central Banks," CEPR Discussion Papers 9722, C.E.P.R. Discussion Papers.
    14. Leitemo, Kai, 2003. "Targeting Inflation by Constant-Interest-Rate Forecasts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 609-626, August.
    15. Andersson, Magnus & Hofmann, Boris, 2009. "Gauging the effectiveness of quantitative forward guidance: evidence from three inflation targeters," Working Paper Series 1098, European Central Bank.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. La tumultueuse expérience suédoise du forward guidance
      by ? in D'un champ l'autre on 2015-01-04 04:00:00

    Citations

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    Cited by:

    1. Åhl, Magnus, 2017. "How big is the toolbox of a central banker? Managing expectations with policy-rate forecasts: Evidence from Sweden," Working Paper Series 339, Sveriges Riksbank (Central Bank of Sweden).
    2. William T. Gavin & Benjamin D. Keen & Alexander W. Richter & Nathaniel A. Throckmorton, 2013. "The stimulative effect of forward guidance," Working Papers 2013-38, Federal Reserve Bank of St. Louis.
    3. Belke, Ansgar, 2017. "Central bank communication: Managing expectations through the monetary dialogue," Ruhr Economic Papers 692, RWI - Leibniz-Institut für Wirtschaftsforschung, Ruhr-University Bochum, TU Dortmund University, University of Duisburg-Essen.
    4. Bihari, Péter, 2015. "Odüsszeuszi utazás - az előretekintő iránymutatás tapasztalatai [An Odysseian journey - experience with forward guidance]," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 749-766.
    5. Tatiana Damjanovic & Vladislav Damjanovic & Charles Nolan, 2017. "Unconditionally Optimal Ramsey policy," CEGAP Working Papers 2017_01, Durham University Business School.
    6. Damjanovic, Tatiana & Damjanovic, Vladislav & Nolan, Charles, 2021. "Unconditionally optimal Ramsey policy," Journal of Macroeconomics, Elsevier, vol. 69(C).
    7. Benjamin D. Keen & Alexander W. Richter & Nathaniel A. Throckmorton, 2017. "Forward Guidance And The State Of The Economy," Economic Inquiry, Western Economic Association International, vol. 55(4), pages 1593-1624, October.
    8. Richhild Moessner & David-Jan Jansen & Jakob de Haan, 2017. "Communication About Future Policy Rates In Theory And Practice: A Survey," Journal of Economic Surveys, Wiley Blackwell, vol. 31(3), pages 678-711, July.
    9. repec:prg:jnlpep:v:preprint:id:631:p:1-19 is not listed on IDEAS
    10. Paul Hubert & Fabien Labondance, 2016. "The Effect of ECB Forward Guidance on Policy Expectations," Working Papers hal-01394821, HAL.
    11. Michelle Bongard & Gabriele Galati & Richhild Moessner & William Nelson, 2021. "Connecting the dots: Market reactions to forecasts of policy rates and forward guidance provided by the Fed," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(1), pages 684-706, January.
    12. Ioanna Kokores, 2015. "Lean-Against-the-Wind Monetary Policy: The Post-Crisis Shift in the Literature," SPOUDAI Journal of Economics and Business, SPOUDAI Journal of Economics and Business, University of Piraeus, vol. 65(3-4), pages 66-99, july-Dece.

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    More about this item

    Keywords

    forward guidance; leaning against the wind; monetary policy; policy rate path;
    All these keywords.

    JEL classification:

    • 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
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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