In addition to setting interest rates, central banks also communicate with the public about economic conditions and future actions. While it has been established that communication can drive expectations, less is known about how it does so. This column attempts to shed light on this question. Applying novel measures to the content of Federal Reserve statements, it shows that forward guidance is a more important driver of market variables than disclosure of information about economic conditions.
Stephen Hansen, Michael McMahon, 03 February 2016
Mickey Levy, 03 November 2014
The Fed is stretching out its zero interest-rate policy waiting for labour market improvements. As unemployment fell the emphasis shifted to wages, which are an even more problematic measure of economic conditions. Basing monetary policy on a notoriously long cyclical laggard is prone to policy mistakes. This column argues that moving up rate hikes would be wise and prudent.
David Miles, 22 October 2014
Many central banks embrace forward guidance by announcing expected interest rate paths. But how likely it is that actual rates will be close to expected ones? This column argues that quantifying such uncertainty poses great difficulties. Precise probability statements in a world of uncertainty (not just risk) can be misleading. It might be better to rely on qualitative guidance such as: “Interest rate rises will probably be gradual and likely to be to a level below the old normal”.
Marcus Miller, Lei Zhang, 10 September 2014
During the Great Moderation, inflation targeting with some form of Taylor rule became the norm at central banks. This column argues that the Global Crisis called for a new approach, and that the divergence in macroeconomic performance since then between the US and the UK on the one hand, and the Eurozone on the other, is partly attributable to monetary policy differences. The ECB’s model of the economy worked well during the Great Moderation, but is ill suited to understanding the Great Recession.
Richard Barwell, Jagjit Chadha, 31 August 2014
In the wake of the crisis, forward guidance has become a prominent tool of monetary policy. This column argues that central banks should go a step further, communicating to the public the internal policy debate that goes into monetary policy formation – especially regarding uncertainty. Since policy is determined contingent on a range of possible outcomes, forward guidance would become more effective by explicitly communicating how policy would respond along this uncertain path.
Masazumi Hattori, Andreas Schrimpf, Vladyslav Sushko, 17 November 2013
This column argues that asset purchases and forward guidance by central banks can be effective in reducing financial market participants’ tail-risk perceptions. US data suggest that, since their inception in 2008, the unconventional policies adopted by the Federal Reserve have significantly compressed perceptions of tail risk. Despite increases in risk premia during the recent ‘tapering’ episode, estimates of tail-risk perceptions still remain significantly below the levels observed when the measures were introduced. Still, the effects of exit on tail-risk perceptions remain uncertain, and will require careful monitoring.
Wouter den Haan, 23 October 2013
Forward guidance is the practice of communicating the future path of monetary policy instruments. This column introduces a new eBook on the subject that collects the views of central bankers from the Fed, ECB, Bank of Japan, and Bank of England together with those of scholars and market participants. Forward guidance could be the key to unwinding massive central-bank balance sheets without severe disruptions.
John C. Williams, 16 October 2013
The Federal Open Market Committee has used various forms of forward guidance to influence the views of businesses, investors and households about where monetary policy is likely to be headed. This column by the President of the San Francisco Fed presents his views on the benefits, limitations and future role of forward policy guidance.
Biagio Bossone, 05 October 2013
So-called ‘helicopter money’ policies – those in which government spending or transfers to households are paid for by printing money – involve both monetary and fiscal policy. This means they require extraordinary cooperation between the government and the central bank, which potentially undermines central-bank independence. However, emergency policies of this type may be justified during extreme systemic crises. Injections of helicopter money can increase net wealth and thus stimulate spending, and this mechanism is particularly important when conventional monetary policy is stuck at the zero lower bound.
Spencer Dale, James Talbot, 13 September 2013
The Bank of England’s Monetary Policy Committee has recently provided some explicit forward guidance regarding the future conduct of monetary policy in the UK. This column by the Bank's Chief economist explains how the MPC designed its forward guidance to respond to the unprecedented challenges facing the UK economy and argues that forward guidance allows the MPC to explore the scope for economic expansion without putting price and financial stability at risk.
Peter Praet, 06 August 2013
The ECB recently changed its monetary policy communication strategy to include a form of forward guidance. This column, written by ECB Executive Board Member Peter Praet, explains the new thinking and argues that it has contributed to more clarity over the ECB’s assessment of the outlook and its reaction function as well as helping to stabilise money-market conditions and anchor expectations more firmly.