Barwell, R. & Chadha, J. (2014) “Publish or be damned or why central banks need to say more about the path of their policy rates“, VoxEU Organisation, 31 August.
In the wake of the crisis, forward guidance has become a prominent tool of monetary policy. This column argues that central banks should go a step further, communicating to the public the internal policy debate that goes into monetary policy formation – especially regarding uncertainty. Since policy is determined contingent on a range of possible outcomes, forward guidance would become more effective by explicitly communicating how policy would respond along this uncertain path.
The central banking community has made significant steps to improve its communication strategy in recent years: generally in response to the challenges posed by the financial crisis, and specifically from the need to manage the exit from an ultra-loose monetary stance. Forward guidance about the future path of policy has become a staple of central bank communication, although the world’s major central banks are yet to adopt the fuller disclosure model pioneered by the Reserve Bank of New Zealand (and subsequently adopted in Scandinavia). In this column we make the case for completing the forward guidance provided by those major central banks. We believe central banks should describe how they expect policy to evolve in the form of probabilistic statements which reflect their understanding of the scale of uncertainty about the future, and correspondingly present density functions that encompass their likely responses.
Relevant posts:
- Visco, I., (2013) “The aftermath of the crisis: Regulation, supervision and the role of central banks“, Centre for Economic Policy Research, Policy Insight No.68, December.
- Wren-Lewis, S. (2013) “Central Banks and Financial Stability“, Social Europe Journal, 18 November.
- Brookings Institution (2013) “The G-20 and Central Banks in the New World of Unconventional Monetary Policy“.