Den Haan, W. ed., (2013), Forward Guidance: Perspectives from Central Bankers, Scholars and Market Participants – A VoxEU.org eBook, London: Centre for Economic Policy Research.
Forward guidance is the provision of information by central banks about the future conduct of monetary policy and in particular about the central bank’s policy interest rate. Forward guidance is aimed at influencing the public’s expectations. This goal is not new. It has long been understood that managing expectations is an important part of monetary policy. In fact, following the high inflationary 1970s, institutions were put in place to credibly anchor expected inflation rates to a low target level.1 The economic logic for this sort of expectations management is simple. Prices and wages set today depend crucially on people’s expectations of the future paths of prices and wages. For example, current inflation will be lower when expected future inflation is lower.
Forward guidance shares the basic economic logic that links today’s decisions to future expectations, but it differs in its subject. Forward guidance focuses on the instruments of monetary policy rather than the targets of monetary policy.
But this aspect of monetary policy is also not new. Before the Global Crisis, monetary-policy committees provided information about their policy interest rate in future periods as well as setting the current rate. Some did so explicitly – providing a numerical forecast of the forward path of the policy interest rate. Other monetary-policy setters did it implicitly – providing more or less explicit messages in official statements and speeches.
What is new, is the scope and motivation for using forward guidance as a monetary-policy tool.2 This has changed substantially during the recent economic downturn for several central banks. The aims of this eBook are to:
- Highlight how the implementation of forward guidance has evolved over time;
- Clarify what central banks hope to achieve with forward guidance;
- Discuss what economic theory says about forward guidance; and
- Raise possible objections to forward guidance or to the way it is currently implemented.
To accomplish these goals, this eBook brings together a collection of contributions written by a diverse group of authors. This include
- Central-bank officials from the Bank of England, the Bank of Japan, the ECB, and the US Federal Reserve;
- Researchers at universities and central banks; and
- Financial-market practitioners.
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