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How effective is central bank forward guidance?

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

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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Length: 40 pages
Date of creation: 2012
Date of revision:
Handle: RePEc:fip:fedlwp:2012-063
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  1. Massimo Guidolin & Daniel L. Thornton, 2010. "Predictions of short-term rates and the expectations hypothesis," Working Papers 2010-013, Federal Reserve Bank of St. Louis.
  2. 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.
  3. Bekaert, Geert & Hodrick, Robert J. & Marshall, David A., 1997. "On biases in tests of the expectations hypothesis of the term structure of interest rates," Journal of Financial Economics, Elsevier, vol. 44(3), pages 309-348, June.
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  7. Daniel L. Thornton, 2004. "Tests of the expectations hypothesis: resolving the Campbell-Shiller paradox," Working Papers 2003-022, Federal Reserve Bank of St. Louis.
  8. 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.
  9. 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.
  10. 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.
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  13. 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.
  14. Nikola Mirkov & Gisle James Natvik, 2013. "Announcements of interest rate forecasts: Do policymakers stick to them?," Working Paper 2013/11, Norges Bank.
  15. Daniel L. Thornton, 2009. "The identification of the response of interest rates to monetary policy actions using market-based measures of monetary policy shocks," Working Papers 2009-037, Federal Reserve Bank of St. Louis.
  16. 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.
  17. 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.
  18. Richhild Moessner, 2013. "Effects of explicit FOMC policy rate guidance on market interest rates," DNB Working Papers 384, Netherlands Central Bank, Research Department.
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  20. Gosselin, Pierre & Lotz, Aileen & Wyplosz, Charles, 2007. "Interest Rate Signals and Central Bank Transparency," CEPR Discussion Papers 6454, C.E.P.R. Discussion Papers.
  21. M. Middeldorp, 2011. "Central Bank Transparency, the Accuracy of Professional Forecasts, and Interest Rate Volatility," Working Papers 11-12, Utrecht School of Economics.
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  23. 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.
  24. 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.
  25. Moessner, Richhild, 2013. "Effects of explicit FOMC policy rate guidance on interest rate expectations," Economics Letters, Elsevier, vol. 121(2), pages 170-173.
  26. 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.
  27. 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.
  28. Daniel L. Thornton, 2003. "Monetary policy transparency: transparent about what?," Working Papers 2002-028, Federal Reserve Bank of St. Louis.
  29. 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.
  30. Richhild Moessner & William Nelson, 2008. "Central bank policy rate guidance and financial market functioning," BIS Working Papers 246, Bank for International Settlements.
  31. Guidolin, Massimo & Thornton, Daniel L., 2008. "Predictions of short-term rates and the expectations hypothesis of the term structure of interest rates," Working Paper Series 0977, European Central Bank.
  32. Richhild Moessner, 2013. "Effects of explicit FOMC policy rate guidance on equities and risk measures," DNB Working Papers 390, Netherlands Central Bank, Research Department.
  33. Frederic S Mishkin, 2004. "Can Central Bank Transparency Go Too Far?," RBA Annual Conference Volume, in: Christopher Kent & Simon Guttmann (ed.), The Future of Inflation Targeting Reserve Bank of Australia.
  34. Richhild Moessner & William R. Nelson, 2008. "Central Bank Policy Rate Guidance and Financial Market Functioning," International Journal of Central Banking, International Journal of Central Banking, vol. 4(4), pages 193-226, December.
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