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When is Lift-off? Evaluating Forward Guidance from the Shadow

  • Matthias Neuenkirch
  • Pierre L. Siklos

We examine the record of the CD Howe’s shadow Monetary Policy Council (SMPC) in Canada. We report a considerable diversity of opinion about the recommended future path of interest rates inside the SMPC. During the period of Bank of Canada forward guidance, market determined forward rates diverge considerably from the recommendations implied by the SMPC. Nevertheless, there is little evidence that the Bank of Canada and the SMPC coordinate their future views about the interest rate path. Finally, changes in views about future changes in policy rates for horizons beyond the next two interest rate decisions are difficult to explain. Our findings imply that there remain challenges in understanding the evolution of future interest rate paths over time. We conclude with some policy implications.

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File URL: http://www.uni-trier.de/fileadmin/fb4/prof/VWL/EWF/Research_Papers/2014-03.pdf
File Function: Second version, 2014
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Paper provided by University of Trier, Department of Economics in its series Research Papers in Economics with number 2014-03.

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Length: 36 pages
Date of creation: 2014
Date of revision:
Handle: RePEc:trr:wpaper:201403
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Web page: http://www.uni-trier.de/index.php?id=2118

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  1. Matthias Neuenkirch & Pierre Siklos, 2013. "How Monetary Policy is Made: Two Canadian Tales," MAGKS Papers on Economics 201341, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  2. Aleš Bulíř & Martin Čihák & David-Jan Jansen, 2013. "What Drives Clarity of Central Bank Communication About Inflation?," Open Economies Review, Springer, vol. 24(1), pages 125-145, February.
  3. Balázs Égert, 2010. "The Impact of Monetary and Commodity Fundamentals, Macro News and Central Bank Communication on the Exchange Rate: Evidence from South Africa," Open Economies Review, Springer, vol. 21(5), pages 655-677, November.
  4. Bernd Hayo & Ummad Mazhar, 2011. "Monetary Policy Committee Transparency: Measurement,Determinants, and Economic Effects," MAGKS Papers on Economics 201140, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
  5. Newey, Whitney K & West, Kenneth D, 1987. "A Simple, Positive Semi-definite, Heteroskedasticity and Autocorrelation Consistent Covariance Matrix," Econometrica, Econometric Society, vol. 55(3), pages 703-08, May.
  6. Arnab Bhattacharjee & Sean Holly, 2010. "Rational Partisan Theory, Uncertainty, And Spatial Voting: Evidence For The Bank Of England'S Mpc," Economics and Politics, Wiley Blackwell, vol. 22(2), pages 151-179, 07.
  7. White, Halbert, 1980. "A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity," Econometrica, Econometric Society, vol. 48(4), pages 817-38, May.
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