Working Paper: NBER ID: w12638
Authors: Glenn D. Rudebusch; John C. Williams
Abstract: The modern view of monetary policy stresses its role in shaping the entire yield curve of interest rates in order to achieve various macroeconomic objectives. A crucial element of this process involves guiding financial market expectations of future central bank actions. Recently, a few central banks have started to explicitly signal their future policy intentions to the public, and two of these banks have even begun publishing their internal interest rate projections. We examine the macroeconomic effects of direct revelation of a central bank's expectations about the future path of the policy rate. We show that, in an economy where private agents have imperfect information about the determination of monetary policy, central bank communication of interest rate projections can help shape financial market expectations and may improve macroeconomic performance.
Keywords: central bank communication; interest rate projections; macroeconomic performance; financial market expectations
JEL Codes: E43; E52
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Publication of interest rate projections (E43) | Shaping of financial market expectations (G19) |
| Shaping of financial market expectations (G19) | Macroeconomic performance (E66) |
| Publication of interest rate projections (E43) | Macroeconomic performance (E66) |
| Central bank transparency (E58) | Macroeconomic stabilization (E63) |
| Clarity of signals (C58) | Effectiveness of transparency (D73) |
| Public's interpretation of signals (D79) | Effectiveness of transparency (D73) |