How Effective is Central Bank Forward Guidance?
FRB of St. Louis Working Paper No. 2012-063A
40 Pages Posted: 5 Jan 2013
Date Written: December 19, 2012
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: Suggested Citation