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The other side of forward guidance: Are central banks constrained by financial markets?

Author

Listed:
  • Matthieu Picault

    (LEO - Laboratoire d'Économie d'Orleans [FRE2014] - UO - Université d'Orléans - UT - Université de Tours - CNRS - Centre National de la Recherche Scientifique)

  • Louis Raffestin

    (LEO - Laboratoire d'Économie d'Orleans [FRE2014] - UO - Université d'Orléans - UT - Université de Tours - CNRS - Centre National de la Recherche Scientifique)

Abstract

We present a theoretical model in which the central bank cares about the short-term stability of financial markets, which gives it an incentive to keep market expectations about future rates at a low level. This incentive is stronger when financial institutions are perceived to be fragile, because the impact on financial stability of a rise in rate expectations is higher in that context. Empirically, both the long-term target of the central bank and the short-term health of the financial sector are strong predictors of the evolution of US Treasury notes rates between two central bank meetings.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Matthieu Picault & Louis Raffestin, 2020. "The other side of forward guidance: Are central banks constrained by financial markets?," Post-Print hal-03533307, HAL.
    • Handle: RePEc:hal:journl:hal-03533307
    DOI: 10.1016/j.frl.2019.101324
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    Cited by:

    1. Ren Wang & Wenhao Jia & Ran Sun, 2024. "“Words” and “actions” of environmental policy and their effects on regional green development: an empirical research based on China’s 88 cities," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 26(10), pages 26909-26944, October.
    2. Jing Zhang & Shuai Chen & Honglei Liu, 2022. "Central bank communication, shadow banking, and bank risk-taking: Theoretical model and PVAR empirical evidence," PLOS ONE, Public Library of Science, vol. 17(9), pages 1-29, September.

    More about this item

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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