Does publication of interest rate paths provide guidance?. (May 2020)

• Record Type: Journal Article
• Authors: Natvik, Gisle J.; Rime, Dagfinn; Syrstad, Olav
• Is Part Of: Journal of international money and finance. Volume 103(2020)
• Publication Date: 2020-05
• Subjects: Monetary policy -- Interest rate paths -- Forward guidance -- High-frequency data -- Forecasts; D72 -- O13 -- Q33; International finance -- Periodicals; Foreign exchange -- Periodicals; Finances internationales -- Périodiques; Change -- Périodiques; Foreign exchange; International finance; Periodicals; 332.04205
• DOI: 10.1016/j.jimonfin.2019.102123
• Languages: English
• ISSNs: 0261-5606

Abstract

Highlights: Market forecast errors in Norway have not changed after publishing interest rate projections. Swedish market forecast errors have improved after publishing interest rate projections. Responses of forecast errors to macroeconomic new have not changed in neither country. Market forecast errors drop in response to policy actions, not policy intentions. Abstract: Does the central bank practice of publishing interest rate projections (IRPs) improve how market participants map new information into future interest rates? Using high-frequency data on forward rate agreements (FRAs) we compute market forecast errors ; differences between expected future interest rates and ex-post realizations. We assess their change in narrow windows around monetary policy announcements and macroeconomic releases in Norway and Sweden. Overall, communication of future policy plans does not improve markets' response to information, irrespective of whether or not IRPs are in place. A decomposition of market reactions into responses to the current monetary policy action ("target") and responses to signals about the future ("path"), reveals that only policy actions lead to improvements in market forecasts.