How Effective Is Central Bank Forward Guidance?

Kool, Clemens; Thornton, Daniel L.

doi:10.20955/r.2015.303-22

Cited by 14 publications

(8 citation statements)

References 22 publications

(31 reference statements)

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“…On the other hand, Filardo and Hofmann (2014) find that forward-guidance, as implemented by the U.S. Federal Reserve, the Bank of Japan, the European Central Bank and the Bank of England during the latter period seems to have lowered the volatility of near-term expectations of future policy rates, but not the level of the expected interest rates. Further, Kool and Thornton (2015) only provide weak evidence that forward-guidance may have improved the market participants ability to forecast short-term interest rates over short horizons in New Zealand, Norway and Sweden in the post-financial crisis period, and no support for this hypothesis in the United States.…”

Section: Introductionmentioning

confidence: 84%

Animal spirits, risk premia and monetary policy at the zero lower bound

Proaño

Lojak

2020

Journal of Economic Behavior & Organization

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In this paper we investigate the risk-related effects of monetary policy in normal times, as well as in periods where the zero lower bound (ZLB) binds, in a stylized macroeconomic model with boundedly rational beliefs. In our model, financial market participants use heuristics to assess the risk premium over the policy rate in accordance to an "implicit Taylor rule" that measures the stance of conventional monetary policy and which serves as an informative instrument during times when the funds rate is constrained by the ZLB. In such a case, conventional monetary policy is exhausted so that the central bank is forced to use unconventional types of policy. We propose alternative monetary policy measures to help the economy out of the liquidity trap which take into account this assumed form of bounded rationality.

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Section: Introductionmentioning

confidence: 84%

Animal spirits, risk premia and monetary policy at the zero lower bound

Proaño

Lojak

2020

Journal of Economic Behavior & Organization

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“…A natural concern is whether forward guidance statements have had a perceptible impact on expectations. Kool and Thornton (2012) argue that they have not, at least not in the context of monetary policy in four leading OECD economies. On the other side, Campbell et al (2012) argue that they did in the United States when viewed over a longer sample period .…”

Section: Introductionmentioning

confidence: 94%

Stabilization and Commitment: Forward Guidance in Economies With Rational Expectations

Hallett

Acocella

2016

Macroecon. Dynam.

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We construct a theory of forward guidance in economic policy making in order to provide a framework to explain the role and strategic advantages of including forward guidance as an explicit part of policy design. We do this by setting up a general policy problem in which forward guidance plays a role, and then examine the consequences for performance when that guidance is withdrawn. Following Acocella et al. (2013), who revisit the classical theory of economic policy in a world with rational expectations, we show that forward guidance provides enhanced controllability and stabilizability -especially where such properties may not otherwise be available. As a bi-product we find that forward guidance limits the scope and incentives for time inconsistent behavior in an economy whose policy goals are ultimately reachable. It also adds to the credibility of a set of policies therefore. JEL Classifications: E42, E58, E61, E63

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“…There is a rapidly growing body of academic evidence which suggests that central bank communication embodies a compelling monetary policy instrument (see for example, Gürkaynak, Sack, and Swanson (2005), Campbell et al (2012), Moessner (2013), and Swanson and Williams (2014) for the US; Moessner and Nelson (2008) and Detmers and Nautz (2012) for New Zealand; Chehal and Trehan (2009) and He (2010) for Canada; Andersson and Hofmann (2009) for Sweden, Norway and New Zealand; and Kool and Thornton (2015) for Sweden, Norway, New Zealand and the United States). However, as noted by Haldane and McMahon (2018), most studies focus primarily on the effect of central bank communication on expectations reflected from financial instruments (e.g., asset prices) and forecasting professionals.…”

Section: Empirical Effectsmentioning

confidence: 99%

A Forward Guidance Indicator for the South African Reserve Bank: Implementing a Text Analysis Algorithm

Erasmus

Hollander

2020

Studies in Economics and Econometrics

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The growing prevalence of forward guidance, in addition to central banks' efforts to improve and structure its use, has spawned growing interest among market participants and academics. Several scholars have endeavoured to develop quantitative tools to measure, or express on a nu merical scale, qualitative forward guidance of central banks. In the context of South Africa, such studies are extremely scant. The expansion of central bank communications and technological advances has given rise to an area of research that analyses the words and phrases used by central banks, using semantic-modelling and other text-mining techniques. Using these techniques, we construct a novel forward guidance indicator (FGI) for the South African Reserve Bank (SARB). Specifically, we apply text-mining and text-analysis techniques to monetary policy committee (MPC) statements to generate an index measuring the stance of monetary policy. Using a series of applications, we establish that our FGis represent a useful tool to explain and predict future changes in the repo rate. Furthermore, our results indicate that our FGis are primarily driven by inflation expectations.

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How Effective Is Central Bank Forward Guidance?

Cited by 14 publications

References 22 publications

Animal spirits, risk premia and monetary policy at the zero lower bound

Animal spirits, risk premia and monetary policy at the zero lower bound

Stabilization and Commitment: Forward Guidance in Economies With Rational Expectations

A Forward Guidance Indicator for the South African Reserve Bank: Implementing a Text Analysis Algorithm

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