Central Bank Policy Paths and Market Forward Rates: A Simple Model

Riksbank Research Paper Series No. 127

Sveriges Riksbank Working Paper Series No. 303

45 Pages Posted: 13 Aug 2015

See all articles by Ferre De Graeve

Ferre De Graeve

KU Leuven - Center for Economic Studies

Jens Iversen

Centre for Economic and Business Research - Copenhagen Business School; Aarhus University - School of Business and Social Sciences

Date Written: June 2015

Abstract

Increasingly many central banks announce likely paths for future policy rates. Recent experience suggest that market forward rates can differ substantially from those announced. Models commonly adopted in policy analysis ignore such differences. This paper studies a simple model that can capture deviations between announced paths and market forward rates. We detail the macroeconomic transmission of such deviations both in the model and in the data and show how the model can inform policy deliberations.

Keywords: Policy path, forward rate, forward guidance

JEL Classification: E43, E44, E58

Suggested Citation

De Graeve, Ferre and Iversen, Jens, Central Bank Policy Paths and Market Forward Rates: A Simple Model (June 2015). Riksbank Research Paper Series No. 127, Sveriges Riksbank Working Paper Series No. 303, Available at SSRN: https://ssrn.com/abstract=2635381 or http://dx.doi.org/10.2139/ssrn.2635381

Ferre De Graeve

KU Leuven - Center for Economic Studies ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Jens Iversen (Contact Author)

Centre for Economic and Business Research - Copenhagen Business School ( email )

Porcelaenshaven 16A
DK-2000 Frederiksberg
Denmark

Aarhus University - School of Business and Social Sciences ( email )

Building 350
DK-8000 Aarhus C
Denmark

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