Working Paper: CEPR ID: DP1051
Authors: Lars E.O. Svensson
Abstract: The use of forward interest rates as a monetary policy indicator is demonstrated, using Sweden between 1992 and 1994 as an example. The forward rates are interpreted as indicating market expectations of the time-path of future interest rates, future inflation rates, and future currency depreciation rates. They separate market expectations for the short, medium and long term more easily than the standard yield curve. Forward rates are estimated with an extended and more flexible version of Nelson and Siegel's functional form.
Keywords: Monetary Policy Indicators; Term Structure of Interest Rates; Inflation Expectations; Credibility
JEL Codes: E50; E52; F31; G12
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| forward interest rates (E43) | market expectations of future short interest rates (E43) |
| forward interest rates (E43) | market expectations of future inflation rates (E43) |
| forward interest rates (E43) | market expectations of future currency depreciation rates (F31) |
| forward interest rates (E43) | marginal lending rate (E52) |
| forward interest rates (E43) | inflation expectations (E31) |
| market expectations of future short interest rates (E43) | monetary policy (E52) |
| market expectations of future inflation rates (E43) | monetary policy (E52) |
| market expectations of future currency depreciation rates (F31) | monetary policy (E52) |