Template-Type: ReDIF-Paper 1.0
Author-Name: Boris Hofmann
Author-X-Name-First: Boris 
Author-X-Name-Last: Hofmann
Author-Name: Dora Xia
Author-X-Name-First: Dora
Author-X-Name-Last: Xia
Title: Quantitative forward guidance through interest rate projections
Abstract: We assess quantitative forward guidance through interest rate projections along four key dimensions: (i) predictability, (ii) credibility, (iii) redundancy and (iv) consistency. Based on data for the Reserve Bank of New Zealand, the Norges Bank, the Sveriges Riksbank and the Federal Reserve, we find that the interest rate projections released by these four central banks are predictable and credible, but in limited ways. Market expectations of the future path of interest rates predict changes in the central bank projection path, but far from fully. Central bank paths' credibility is limited as markets adjust to path surprises, but far from a one-to-one basis. Both predictability and credibility decrease with the projection horizon. We further find that central bank interest rate projections are not redundant as they impact market expectations also when controlling for the effects of central bank macro projections that are released in parallel. Finally, the interest rate projections are consistent with the macro projections as they are empirically linked by a stabilising Taylor rule.     
Length: 39 pages
Creation-Date: 2022-03
File-URL: https://www.bis.org/publ/work1009.pdf
File-Format: Application/pdf
File-Function: Full PDF document
File-URL: https://www.bis.org/publ/work1009.htm
File-Format: text/html
Number: 1009
Keywords: forward guidance, interest rate projections, central bank communication.
Classification-JEL: E52, E58.
Handle: RePEc:bis:biswps:1009