Can More Public Information Raise Uncertainty? The International Evidence on Forward Guidance

53 Pages Posted: 17 Apr 2019

See all articles by Michael Ehrmann

Michael Ehrmann

European Central Bank (ECB); Bank of Canada

Gaetano Gaballo

Banque de France

Peter Hoffmann

European Central Bank (ECB) - Directorate General Research

Georg Strasser

European Central Bank (ECB) - Directorate General Research

Date Written: April 15, 2019

Abstract

Central banks have used different types of forward guidance, where the forward guidance horizon is related to a state contingency, a calendar date or left open-ended. This paper reports cross-country evidence on the impact of these different types of forward guidance on the sensitivity of bond yields to macroeconomic news, and on forecaster disagreement about the future path of interest rates. We show that forward guidance mutes the response to macroeconomic news in general, but that calendar-based forward guidance with a short horizon counterintuitively raises it. Using a model where agents learn from market signals, we show that the release of more precise public information about future rates lowers the informativeness of market signals and, as a consequence, may increase uncertainty and amplify the reaction of expectations to macroeconomic news. However, when the increase in precision of public information is sufficiently large, uncertainty is unambiguously reduced.

Keywords: central bank communication, heterogeneous beliefs, forward guidance, disagreement, macroeconomic news

JEL Classification: D83, E43, E52, E58

Suggested Citation

Ehrmann, Michael and Gaballo, Gaetano and Hoffmann, Peter and Strasser, Georg H., Can More Public Information Raise Uncertainty? The International Evidence on Forward Guidance (April 15, 2019). ECB Working Paper No. 2263. Available at SSRN: https://ssrn.com/abstract=3372933

Michael Ehrmann (Contact Author)

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344/7327 (Phone)
+49 69 1344/6000 (Fax)

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Gaetano Gaballo

Banque de France ( email )

Paris
France

Peter Hoffmann

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Georg H. Strasser

European Central Bank (ECB) - Directorate General Research ( email )

Sonnemannstra├če 20
Frankfurt am Main, 60314
Germany
+496913441416 (Phone)

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