Working Paper: CEPR ID: DP9722
Authors: Michael Woodford
Abstract: This paper assesses the value of central-bank communication about likely future policy, with particular reference to the regular publication of projections for the future path of the policy rate, as with the Riksbank's publication of the repo rate path. It first discusses why publication of a projected interest-rate path represents a natural and desirable evolution of inflation-forecast targeting procedures, and the conditions under which the assumptions about future policy underlying such projections will be intertemporally consistent. It then discusses evidence on the extent to which central-bank statements influence private-sector interest-rate expectations. Particular attention is given to the potential use of forward guidance as an additional tool of policy when an executive lower bound for the policy rate is reached, and alternative approaches to forward guidance in this context are compared, including the recent adoption of quantitative "thresholds" for unemployment and inflation expectations by the U.S. Federal Reserve. The potential role of a nominal GDP level target within an inflation-targeting regime is also considered.
Keywords: Forward Guidance; Inflation Targeting; Central Banks
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| central bank communication (E58) | private sector interest rate expectations (E43) |
| publication of projected interest rate paths (E43) | private sector expectations (E69) |
| forward guidance (E60) | market expectations (D84) |
| forward guidance (E60) | economic outcomes (F61) |
| central bank communication (E58) | stabilization of inflation and output (E63) |
| explicit communication about future policy (E60) | mitigate negative effects of lower bound on economic activity (F69) |
| forward guidance (E60) | manage expectations (D84) |
| forward guidance (E60) | prevent larger declines in output and inflation (E31) |