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5 - Central Bank Talk about Future Monetary Policy

Lessons from the Crisis and Beyond

from Part I - Monetary Economics and Policy

Published online by Cambridge University Press:  29 March 2018

Philipp Hartmann
Affiliation:
European Central Bank, Frankfurt
Haizhou Huang
Affiliation:
China International Capital Corporation
Dirk Schoenmaker
Affiliation:
Erasmus Universiteit Rotterdam
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Summary

Central banks have long given clues of varying specificity about how they might alter their monetary policy interest rates in the future. But “forward guidance” about future policy actions -or pledge of lack of action- has come into much wider use since policy interest rates approached zero in late 2008, and the nature of the guidance has evolved toward time-based guidance: how long rates would remain close to zero. Although such guidance might be a necessary tool for shaping expectations when policy rates are around zero, time-based guidance is not compatible on a sustained basis with the considerable uncertainties that surround our knowledge of how the economy works, and should be exited as policy rates lift off. This chapter explores the experience of the Federal Reserve with forward guidance since the Global Financial Crisis. The Federal Reserve has reduced its reliance on time-based guidance as it has begun to raise rates, but the transition is incomplete and the chapter offers suggestions about how the Federal Reserve might more thoroughly exit from time-based forward guidance and increase the focus of its communications on the economic circumstances that will shape its strategy as rates rise above the effective lower bound.
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Publisher: Cambridge University Press
Print publication year: 2018

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