scholarly journals The Power of Forward Guidance Revisited

2016 ◽  
Vol 106 (10) ◽  
pp. 3133-3158 ◽  
Author(s):  
Alisdair McKay ◽  
Emi Nakamura ◽  
Jón Steinsson
Keyword(s):  
Interest Rates ◽  
Borrowing Constraints ◽  
Precautionary Savings ◽  
Complete Markets ◽  
Income Risk ◽  
Forward Guidance ◽  
Highly Sensitive ◽  
Monetary Models ◽  
Central Tool ◽  
Far Future

In recent years, central banks have increasingly turned to forward guidance as a central tool of monetary policy. Standard monetary models imply that far future forward guidance has huge effects on current outcomes, and these effects grow with the horizon of the forward guidance. We present a model in which the power of forward guidance is highly sensitive to the assumption of complete markets. When agents face uninsurable income risk and borrowing constraints, a precautionary savings effect tempers their responses to changes in future interest rates. As a consequence, forward guidance has substantially less power to stimulate the economy. (JEL E21, E40, E50)

scholarly journals Precautionary Savings, Illiquid Assets, and the Aggregate Consequences of Shocks to Household Income Risk

Econometrica ◽  
2019 ◽  
Vol 87 (1) ◽  
pp. 255-290 ◽  
Author(s):  
Christian Bayer ◽  
Ralph Luetticke ◽  
Lien Pham-Dao ◽  
Volker Tjaden
Keyword(s):  
Household Income ◽  
Precautionary Savings ◽  
Income Risk ◽  
Illiquid Assets

Political pressure on Turkey's Central Bank will go on

2015 ◽  
Keyword(s):  
Interest Rates ◽  
Sharp Decline ◽  
Content Type ◽  
Balance Sheets ◽  
The Past ◽  
Consumer Prices ◽  
Highly Sensitive ◽  
The Us ◽  
External Sources ◽  
Run Up

Significance The CBRT is expected to respond at its regular monthly interest rate-setting meeting to the fall in inflation in January to 7.2%. However, while the nearly 50% slide in oil prices since last June has led to a sharp decline in headline consumer prices, core inflation has been hovering near 9% for the last four months -- significantly above the CBRT's 5% inflation target. Just as importantly, Turkey's currency has fallen to a record low against the dollar, losing 7% over the past month because of the increasing politicisation of Turkish monetary policy and mounting expectations that the US Federal Reserve (Fed) will begin hiking interest rates as early as June, putting Turkish assets under renewed strain. Impacts CBRT independence is becoming one of the main focal points for market concern about emerging markets. Heavy reliance on external sources of finance will leave Turkey highly sensitive to resurgent dollar and increased US Treasury yields. Renewed lira weakness is likely to persist in the run-up to elections in June, which could also coincide with rising US interest rates. That would put further pressure on the balance sheets of Turkey's heavily indebted corporate sector.

scholarly journals Does Forward Guidance Matter in Small Open Economies? Examples from Europe

2019 ◽  
Vol 4 (1) ◽  
pp. 1-26
Author(s):  
Jakub Rybacki
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Term Structure ◽  
Open Economies ◽  
Central Banks ◽  
Small Open Economies ◽  
Forecast Horizon ◽  
The Czech Republic ◽  
Forward Guidance ◽  
European Economies

The effect of forward guidance on interest rate expectations in small, open economies is often described as heterogeneous. There are examples when financial markets adjusted term structure to reflect interest rate forecasts provided in the projections published by the central banks. On the other hand, medium-term expectations can persistently deviate from trajectories presented by decision-makers, influenced by foreign monetary policy. Our aim is to find the maximal forecast horizon where the domestic forward guidance of local banks in European economies affects market interest rate expectations strongly as compared to the ECB policy. We analyzed the term structure of interest rates in Sweden, Norway, and the Czech Republic. Central banks in these three economies provide the most mature forward guidance, e.g., regularly publishing interest rate forecasts with detailed discussions. The three-month interbank rate path calculated with the Nelson-Siegel model was contrasted with both the trajectory of policy rates presented in central bank projections and that implied by the three-month EURIBOR. We found that interest rate expectations were more influenced by ECB policy than by domestic assumptions when the forecast horizon exceeds four quarters.

scholarly journals Ewolucja zmian i zadania banków centralnych w świetle doświadczeń kryzysu finansowego

2015 ◽  
Vol 1 (3) ◽  
pp. 35-50
Author(s):  
Agnieszka Alińska ◽  
Bogusław Pietrzak ◽  
Katarzyna Wasiak
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Inflation Targeting ◽  
Central Banks ◽  
Communication Policy ◽  
Market Participants ◽  
Forward Guidance ◽  
Monetary Authorities ◽  
Effective Instrument ◽  
Targeting Strategy

Communication policy of central banks in the framework of direct inflation targeting strategy and related strategies is important. Its tools include forward guidance as a method of influencing the expectations of market participants. Although forward guidance was used before the outbreak of the financial crisis, it was not popular. After 2008, under conditions of zero interest rate, monetary authorities have begun After 2008, under conditions of zero interest rate, monetary authorities have begun to use the forward guidance as an unconventional and effective instrument allowing monetary policy to have impact on market interest rates. However, the riskswhen using forward guidance include the possibility of misinterpretation of the conditional nature of the declaration of the monetary authorities.

Constrained Credit

2017 ◽  
Author(s):  
Stefan Homburg
Keyword(s):  
Interest Rates ◽  
Great Recession ◽  
Borrowing Constraints ◽  
Monetary Policies ◽  
The Great Recession ◽  
Credit Creation ◽  
Advanced Economies ◽  
Borrowing Constraint ◽  
Depth Analysis ◽  
Money Creation

Chapter 4 considers economies with borrowing constraints. This assumption is motivated by the observation that monetary expansions after the Great Recession did not entail inflation in the expected manner. At the same time, nominal and real interest rates tended to decline in many advanced economies. The text offers an in-depth analysis of credit crunches, liquidity traps, and interest rates at the zero lower bound and demonstrates that borrowing constraints help reconcile theory and evidence. According to the key insight, a binding borrowing constraint detaches money creation from credit creation. In this case, inflation ceases to be a monetary phenomenon, as in standard models, but becomes a credit phenomenon. This finding explains why expansionary monetary policies failed to produce inflation since the Great Recession.

Central Bank Planning

2018 ◽  
Author(s):  
Benjamin Braun
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Interest Rates ◽  
Practical Reasoning ◽  
Structural Break ◽  
Central Banks ◽  
State Agency ◽  
Policy Interventions ◽  
Forward Guidance

Central banks have increasingly used communication to guide market actors’ expectations of future rates of interest, inflation, and growth. However, aware of the pitfalls of (financial) central planning, central bankers until recently drew a line by restricting their monetary policy interventions to short-term interest rates. Longer-term rates, they argued, reflected decentralized knowledge and should be determined by market forces. By embracing forward guidance and quantitative easing (QE) to target long-term rates, central banks have crossed that line. While consistent with the post-1980s expansion of the temporal reach of monetary policy further into the future, these unconventional policies nevertheless mark a structural break—the return of hydraulic macroeconomic state agency, refashioned for a financialized economy. This chapter analyses the theoretical and practical reasoning behind this shift in the governability paradigm and examines the epistemic and reputational costs of modern central bank planning and the non-market setting of long-term bond prices.

Central Bank Communication

2019 ◽  
pp. 230-262
Author(s):  
Jakob de Haan ◽  
Jan-Egbert Sturm
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Central Banks ◽  
Inflation Expectations ◽  
Short Term ◽  
The Public ◽  
Central Bank Communication ◽  
Forward Guidance ◽  
The World ◽  
Future Direction

Many central banks in the world nowadays regard their external communication as an important tool to achieve their goals. This chapter provides an overview of the different ways in which central banks inform the public about the future direction of monetary policy and how successful they have been in recent years. Forward guidance is either part of a monetary policy strategy in which an explicit inflation target is targeted or is part of a strategy that attempts to circumvent the effective lower bound regarding the nominal interest rate. In both cases, forward guidance attempts to influence longer-term interest rates and inflation expectations through the expected future short-term interest rates.

Overheating may tighten Central Europe monetary policy

2018 ◽  
Keyword(s):  
Monetary Policy ◽  
Czech Republic ◽  
Interest Rates ◽  
Negative Impact ◽  
The Czech Republic ◽  
Content Type ◽  
Forward Guidance ◽  
Consumer Prices ◽  
Global Liquidity ◽  
Capital Outflows

Significance The meetings are expected to provide forward guidance on monetary policy. With consumer prices reaching a five-and-a-half year high in Hungary and a seven-month high in the Czech Republic, attention has turned to the future trajectory of Central European (CE) interest rates. Tightening would run against the populist streak of governments in both Prague and Budapest. Impacts Rate hikes in the Czech Republic and eventually also in Hungary by mid-2019 may contribute to a broad-based slowdown in growth next year. Tighter rates may moderate the headline inflation rate in January-June 2019, partly offsetting the negative impact of economic overheating. CE currencies may gradually strengthen, helping to shield against excessive capital outflows, as global liquidity conditions tighten. Some monetary policy divergence is likely within CE, as Poland’s central bank is unlikely to push for higher interest rates before end-2019.

scholarly journals Macroeconomic Fluctuations with HANK&SAM: an Analytical Approach

2020 ◽  
Author(s):  
Morten O Ravn ◽  
Vincent Sterk
Keyword(s):  
Steady State ◽  
Interest Rates ◽  
New Keynesian ◽  
Macroeconomic Fluctuations ◽  
Precautionary Savings ◽  
Downward Pressure ◽  
Considerable Impact ◽  
Earnings Risk ◽  
Model Features ◽  
The Impact

Abstract Recently developed HANK models, which combine Heterogeneous Agents and New Keynesian frictions, have had a considerable impact on macroeconomics. However, due to the complexity of such models, the literature has focused on numerically solved models and therefore little is known about their general properties. This paper presents a tractable HANK model that integrates Search and Matching (SAM) frictions in the labor market. The model features an endogenous idiosyncratic earnings risk, which may be procyclical or countercyclical. When this risk is countercyclical, which we argue is the empirically plausible case, there is a downward pressure on real interest rates in recessions due to a precautionary savings motive. We show that in this setting (a) the economy may get stuck in a high-unemployment steady state, (b) the Taylor principle is insufficient to eliminate the local indeterminacy of the intended steady state, and (c) nominal rigidities and inincomplete markets are complementary in terms of amplifying the impact of shocks on the macroeconomy.

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