The Effects of Forward Guidance: What Do We Learn from Staff Forecasts and Survey-Based Expectations?

Posted: 31 Mar 2015

See all articles by Peter G. Dunne

Peter G. Dunne

Central Bank of Ireland

Danielle Kedan

Independent

Gerard O'Reilly

Central Bank & Financial Services Authority of Ireland

Rebecca Stuart

Central Bank of Ireland

Date Written: March 31, 2015

Abstract

The path of the policy interest rate expected by financial markets was shifted by the ECB's forward guidance of July 2013. This provides tentative evidence that market expectations had, in advance of the forward guidance, diverged from a path that would have been consistent with the ECB's normal policy reaction function. However, the apparent correction could also have been the result of an unusual revision in market expectations of inflation and growth. The potential for negative side-effects from forward guidance through revised expectations of growth, motivates our assessment of the strength of such effects. We use ECB Staff Projections and the Survey of Professional Forecasters' expectations of inflation and growth to show that forecasts were indeed out-of-line with projections of a fitted policy reaction function estimated before the period of imminent forward guidance. We find that, after forward guidance, market expectations became better aligned with projections based on the same fitted reaction function. Growth and inflation expectations were not as significantly revised as was feared. This substantially confirms the assertion by Praet (2013) that there was a need for reassertion of the policy rule and that this was effective.

Keywords: Forward Guidance

JEL Classification: C23, E43, E47, E52, E58

Suggested Citation

Dunne, Peter G. and Kedan, Danielle and O'Reilly, Gerard and Stuart, Rebecca, The Effects of Forward Guidance: What Do We Learn from Staff Forecasts and Survey-Based Expectations? (March 31, 2015). Available at SSRN: https://ssrn.com/abstract=2587674 or http://dx.doi.org/10.2139/ssrn.2587674

Peter G. Dunne (Contact Author)

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

Danielle Kedan

Independent ( email )

Gerard O'Reilly

Central Bank & Financial Services Authority of Ireland ( email )

P.O. 559 Dame Street
Dublin 2, D2
Ireland

Rebecca Stuart

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2
Ireland

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