The Use of Financial Market Indicators by Monetary Authorities

Abstract

81489 Document complet disponible sur OLIS dans son format d'origineComplete document available on OLIS in its original format ECO/WKP(99)15 2 ABSTRACT/RÉSUMÉIn a new and changing environment for monetary policy, an interesting issue to examine is the use of financial market indicators by monetary policy authorities. With this in mind, the OECD canvassed a number of major central banks to get their views. This paper presents a synthesis of the responses and respects the confidentiality of individual central banks. Its main conclusions are as follows. In principle, financial market variables can provide additional information regarding the shocks that strike the economy, such as their perceived size and source as well as the process of feeding through the economy. A complementary function is to gauge market anticipations and reactions to policy changes, including the credibility of policy objectives. Regarding policy setting, monetary authorities are clearly aware of the dangers of mechanically targeting this information, which could lead to circularities. However, in some cases, they seem to find financial market indicators useful in evaluating policy credibility and in making tactical decisions. The most serious disadvantage of these indicators is the difficulty in disentangling their information content. Moreover, the relationships between them and the final target variables are sometimes poor, and financial markets tend to overreact to news and are thus subject to herding and potentially to speculative bubbles. In sum, the information can be highly distorted by various time-varying risk premia and, accordingly, the progress in understanding them has been limited, leaving a large judgmental role to the monetary authorities. Use of these data varies among monetary authorities and, overall, they are still feeling their way regarding the role for these newer financial market indicators. JEL classification: E50, 358, G14Keywords: monetary policy indicators, central bank policies, financial market indicators ***** Dans un environnement de politique monétaire nouveau et en pleine évolution, il nous a semblé intéressant d'examiner l'usage que les autorités de la politique monétaire font des indicateurs du marché financier. C'est dans cette optique que l'OCDE a sollicité l'avis d'un certain nombre de grandes banques centrales. Ce document présente une synthèse de l'ensemble de leurs opinions, tout en respectant la confidentialité de chacune d'entre elles, dont les principales conclusions sont les suivantes. En principe, les variables concernant le marché financier peuvent fournir des informations supplémentaires en ce qui concerne les secousses qui frappent l'économie, en ce sens qu'elles en perçoivent l'ampleur, la source aussi bien que les répercussions sur le système économique. Une de leurs fonctions complémentaires est d'évaluer les anticipations du marché et les réactions aux changements de politique, ainsi que la crédibilité des objectifs politiques. Bien que les autorités monétaires soient pleinement conscient...