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How effective is central bank forward guidance?

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

This paper investigates the effectiveness of forward guidance for the central banks of four countries: New Zealand, Norway, Sweden, and the United States. We test whether forward guidance improved market participants’ ability to forecast future short-term and long-term rates. We find that forward guidance improved market participants’ ability to forecast short-term rates over relatively short forecast horizons, but only for Norway and Sweden. Importantly, there is no evidence that forward guidance has increased the efficacy of monetary policy for New Zealand, the country with the longest history of forward guidance.

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File URL: http://research.stlouisfed.org/wp/2012/2012-063.pdf
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Paper provided by Federal Reserve Bank of St. Louis in its series Working Papers with number 2012-063.

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Date of creation: 2012
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Handle: RePEc:fip:fedlwp:2012-063
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  1. Daniel L. Thornton, 2004. "Tests of the expectations hypothesis: resolving the Campbell-Shiller paradox," Working Papers 2003-022, Federal Reserve Bank of St. Louis.
  2. Daniel L. Thornton, 2003. "Monetary policy transparency: transparent about what?," Working Papers 2002-028, Federal Reserve Bank of St. Louis.
  3. Charles Goodhart, 2009. "The Interest Rate Conditioning Assumption," International Journal of Central Banking, International Journal of Central Banking, vol. 5(2), pages 85-108, June.
  4. Thornton, Daniel L., 2005. "Tests of the expectations hypothesis: Resolving the anomalies when the short-term rate is the federal funds rate," Journal of Banking & Finance, Elsevier, vol. 29(10), pages 2541-2556, October.
  5. Menno Middeldorp, 2011. "Central Bank Transparency, the Accuracy of Professional Forecasts, and Interest Rate Volatility," Working Papers 11-12, Utrecht School of Economics.
  6. 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.
  7. Diebold, Francis X & Mariano, Roberto S, 1995. "Comparing Predictive Accuracy," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(3), pages 253-63, July.
  8. Giuseppe Ferrero & Alessandro Secchi, 2009. "The Announcement of Monetary Policy Intentions," Temi di discussione (Economic working papers) 720, Bank of Italy, Economic Research and International Relations Area.
  9. Gosselin, Pierre & Lotz, Aileen & Wyplosz, Charles, 2007. "Interest Rate Signals and Central Bank Transparency," CEPR Discussion Papers 6454, C.E.P.R. Discussion Papers.
  10. Adam Kot & Michal Brzoza-Brzezina, 2008. "The Relativity Theory Revisited: Is Publishing Interest Rate Forecasts Really so Valuable?," National Bank of Poland Working Papers 52, National Bank of Poland, Economic Institute.
  11. Harvey, David & Leybourne, Stephen & Newbold, Paul, 1997. "Testing the equality of prediction mean squared errors," International Journal of Forecasting, Elsevier, vol. 13(2), pages 281-291, June.
  12. 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.
  13. 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.
  14. Clemens J. M. Kool & Daniel L. Thornton, 2003. "A note on the expectations hypothesis at the founding of the Fed," Working Papers 2000-004, Federal Reserve Bank of St. Louis.
  15. Clemens Kool & Menno Middeldorp & Stephanie Rosenkranz, 2011. "Central Bank Transparency and the Crowding Out of Private Information in Financial Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(4), pages 765-774, 06.
  16. Frederic S. Mishkin, 2004. "Can Central Bank Transparency Go Too Far?," NBER Working Papers 10829, National Bureau of Economic Research, Inc.
  17. Sharon McCaw & Satish Ranchhod, 2002. "The Reserve Bank's forecasting performance," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 65, December.
  18. Jane Turner, 2006. "An assessment of recent Reserve Bank forecasts," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 69, pages 6p, September.
  19. 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.
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