The Interest Rate Conditioning Assumption
by Charles Goodhart
Financial Markets Group, London School of Economics
A central bank’s forecast must contain some assumption about the future path for its own policy-determined short-term interest rate. I discuss the advantages and disadvantages of the three main alternatives:
Most countries initially chose alternative (i). With many central banks having planned to raise interest rates at a measured pace in the years 2004–06, there was a shift to (ii). However, Norway, and now Sweden, has followed New Zealand in adopting (iii), and the United Kingdom has also considered this move. So this is a lively issue.
- constant from the latest level
- as implicitly predicted from the yield curve
- chosen by the monetary policy committee (MPC)
JEL Codes: G21, G28.
(PDF, 24 pages 294 kb)