Day One Keynote Address: Forward Guidance
by Last E.O. Svensson
Stockholm School of Economics; Stockholm University; CEPR; and NBER
Forward guidance about future policy settings, in the form of a published policy rate path, has for many years been a natural part of normal monetary policy for several central banks, including the Reserve Bank of New Zealand and the
Swedish Riksbank. More recently, the Federal Reserve has started to publish FOMC participants’ policy rate projections. The Swedish, New Zealand, and U.S. experience of a published policy rate path is examined, especially to what extent
the market has anticipated the path (the predictability of the path) and to what extent market expectations line up with the path after publication (the credibility of the path). The recent Swedish experience is quite dramatic. In particular, it
shows a case with a large discrepancy between a high and rising Riksbank path and a low and falling market path, with the market path providing a good forecast of the future policy rate. The discrepancy is explained by the Riksbank’s leaning against
the wind in recent years and related circumstances. The New Zealand experience is less dramatic but shows cases where the market implements either a substantially tighter or easier policy than intended by the RBNZ. There are also cases of the
market being ahead of the RBNZ and the RBNZ later following the market. The U.S. experience includes a recent case of the market expecting and implementing substantially easier policy consistent with the FOMC projections, the possible
explanation of which has been much discussed.
JEL Codes: E52, E58, G14.
Full article (PDF, 46 pages, 2597 kb)