Federal Reserve Transparency and Financial Market Forecasts of Short-Term Interest Rates

Finance and Economics Discussion Series No. 2004-6

37 Pages Posted: 10 Mar 2004

See all articles by Eric T. Swanson

Eric T. Swanson

University of California, Irvine - Department of Economics

Date Written: February 2004

Abstract

The 1990s and early 2000s witnessed an unprecedented increase in central bank transparency around the world, yet there has been little empirical work that convincingly demonstrates any economic benefits of increased central bank transparency. This paper shows that, since the late 1980s, U.S, financial markets and private sector forecasters have become: 1) better able to forecast the federal funds rate at horizons out to several months, 2) less surprised by Federal Reserve announcements, 3) more certain of their interest rate forecasts ex ante, as measured by interest rate options, and 4) less diverse in the cross-sectional variety of their interest rate forecasts. We also show that increases in Federal Reserve transparency are likely to have played a role: for example, private sector forecasts of GDP and inflation have not experienced similar improvements over the same period, indicating that the improvement in interest rate forecasts has been special.

Keywords: Transparency, monetary policy, forecasts

JEL Classification: E52, E58, E43, E44

Suggested Citation

Swanson, Eric T., Federal Reserve Transparency and Financial Market Forecasts of Short-Term Interest Rates (February 2004). Finance and Economics Discussion Series No. 2004-6, Available at SSRN: https://ssrn.com/abstract=515862 or http://dx.doi.org/10.2139/ssrn.515862

Eric T. Swanson (Contact Author)

University of California, Irvine - Department of Economics ( email )

University of California, Irvine
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Irvine, CA 92697-5100
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HOME PAGE: http://www.ericswanson.org

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