Forward Guidance Through Interest Rate Projections: Does It Work?

36 Pages Posted: 2 May 2017

See all articles by Leif Brubakk

Leif Brubakk

Independent

Saskia ter Ellen

Norges Bank

Hong Xu

Norges Bank; Bank of England

Date Written: April 19, 2017

Abstract

Based on high-frequency data for Norway and Sweden, we investigate to what extent explicit forward guidance from monetary policy makers, by means of publishing the path of expected future policy rates, affects the market yield curve. We summarise movements in the yield curve by two latent factors (the 'target factor' and 'market path factor'), which capture market participants' assessment of all relevant monetary policy communication made available on announcement days. We then show that information contained in the published interest rate path has a significant effect on the market path, and can explain up to 47% of the market path factor. Hence, we conclude that 'explicit' forward guidance in the form of publishing the interest rate path succeeds in moving markets in the desired direction. Furthermore, our results show that central bank and market revisions of interest rate expectations are strongly correlated. This suggests that market participants to a large extent understand the monetary policy reaction pattern.

Keywords: monetary policy, forward guidance, interest rates

JEL Classification: E43; E44; E52; E58; G12

Suggested Citation

Brubakk, Leif and ter Ellen, Saskia and Xu, Hong, Forward Guidance Through Interest Rate Projections: Does It Work? (April 19, 2017). Norges Bank Working Paper 6/2017. Available at SSRN: https://ssrn.com/abstract=2955662 or http://dx.doi.org/10.2139/ssrn.2955662

Leif Brubakk

Independent ( email )

No Address Available

Saskia Ter Ellen (Contact Author)

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway

Hong Xu

Norges Bank ( email )

P.O. Box 1179
Oslo, N-0107
Norway
004722316241 (Phone)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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