Central Bank Forward Guidance and the Signal Value of Market Prices
AbstractCentral banks use forward guidance to steer market expectations of future monetary policy moves. At the same time, they rely on market prices to gauge the likely path of the economy and the appropriate stance of monetary policy. This two-way flow between market prices and forward guidance can create a circularity. Market signals may be rendered less informative when the central bank heeds market signals in formulating forward guidance, as those market signals reflect the diminished weight placed by market participants on their private signals.
CitationMorris, Stephen, and Hyun Song Shin. 2018. "Central Bank Forward Guidance and the Signal Value of Market Prices." AEA Papers and Proceedings, 108: 572-77. DOI: 10.1257/pandp.20181081
- E31 Price Level; Inflation; Deflation
- E43 Interest Rates: Determination, Term Structure, and Effects
- E52 Monetary Policy
- E58 Central Banks and Their Policies