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December 2008 issue
List of authors
 
Cassola, Morana
Haugh
Piger, Rasche
Blinder, Morgan
Tetlow
Moessner, Nelson
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Central Bank Policy Rate Guidance and Financial Market Functioning

by Richhild Moessnera and William R. Nelsonb

Abstract

Several central bankers have expressed concern that providing forecasts of future policy rates may impair financial-market functioning.We look for evidence of such impairment by examining the behavior of financial markets in the United States, the euro area, and New Zealand in light of the communication strategies of the central banks. While we find evidence that central bank policy rate forecasts influence market prices in New Zealand, we find no evidence that market participants in the three regions systematically overweight policy rate guidance or that they do not appreciate the uncertainty and conditionality of it. The results suggest that the risk of impairing market functioning is not a strong argument against central banks’ provision of policy rate guidance or forecasts.

JEL Codes: E52, E58, G14.

 
Full article (PDF, 34 pages 451 kb)

 


aBank for International Settlements
bFederal Reserve Board