Working Paper: NBER ID: w4871
Authors: Lars E. O. Svensson
Abstract: The use of forward interest rates as a monetary policy indicator is demonstrated, using Sweden 1992-1994 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: forward interest rates; monetary policy; Sweden
JEL Codes: E43; E52
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 inflation rates (E31) |
| forward interest rates (E43) | market expectations of currency depreciation rates (F31) |
| forward interest rates (E43) | expected future spot rates (E43) |
| forward interest rates (E43) | clearer separation of expectations for short, medium, and long-term rates (E43) |