How Effective is Central Bank Forward Guidance?

FRB of St. Louis Working Paper No. 2012-063A

40 Pages Posted: 5 Jan 2013

See all articles by Clemens J.M. Kool

Clemens J.M. Kool

Utrecht University - School of Economics

Daniel L. Thornton

Federal Reserve Bank of St. Louis - Research Division

Multiple version iconThere are 3 versions of this paper

Date Written: December 19, 2012

Abstract

This paper investigates the effectiveness of forward guidance for the central banks of four countries: New Zealand, Norway, Sweden, and the United States. We test whether forward guidance improved market participants’ ability to forecast future short-term and long-term rates. We find that forward guidance improved market participants’ ability to forecast short-term rates over relatively short forecast horizons, but only for Norway and Sweden. Importantly, there is no evidence that forward guidance has increased the efficacy of monetary policy for New Zealand, the country with the longest history of forward guidance.

Keywords: monetary policy, central bank transparency, interest rates, term structure, forecasting

JEL Classification: E52, E43, E47

Suggested Citation

Kool, Clemens J.M. and Thornton, Daniel L., How Effective is Central Bank Forward Guidance? (December 19, 2012). FRB of St. Louis Working Paper No. 2012-063A. Available at SSRN: https://ssrn.com/abstract=2196612 or http://dx.doi.org/10.2139/ssrn.2196612

Clemens J.M. Kool

Utrecht University - School of Economics ( email )

Kriekenpitplein 21-22
Adam Smith Building
Utrecht, 3584 EC
Netherlands

Daniel L. Thornton (Contact Author)

Federal Reserve Bank of St. Louis - Research Division ( email )

411 Locust St
Saint Louis, MO 63011
United States
314-444-8582 (Phone)
314-444-8731 (Fax)

HOME PAGE: http://research.stlouisfed.org/econ/thornton/

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