Working Paper: NBER ID: w4633
Authors: Lars E. O. Svensson
Abstract: In the new situation with flexible exchange rates, monetary policy in Europe will have to rely more on indicators than previously under fixed rates. One of the potential indicators, the forward interest rate curve, can be used to indicate market expectations of the time-paths of future short interest rates, monetary policy, inflation rates and currency depreciation rates. The forward rate curve separates market expectations for the short, medium and long term more easily than the standard yield curve. Monetary policy in France, Germany, Great Britain, Sweden and the United States is interpreted with the help of forward rates.
Keywords: Monetary Policy; Flexible Exchange Rates; Forward Interest Rates
JEL Codes: E52; E58; F31
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 for future short-term interest rates (E43) |
| forward interest rates (E43) | market expectations for inflation rates (E31) |
| forward interest rates (E43) | market expectations for currency depreciation rates (F31) |
| transition from fixed to flexible exchange rates (F33) | reliance on forward interest rates as indicators (E43) |
| reliance on forward interest rates as indicators (E43) | how central banks adjust their monetary policy instruments (E52) |