We discuss the theoretical rationale for central bank communication about future policy rates as part of inflation targeting or of forward guidance. We also summarize actual central bank communication about future policy rates in major advanced countries as well as empirical evidence on the effectiveness of both types of communication. We argue that there is a disconnect between the theory and practice of forward guidance, with theory assuming commitment by the central bank, while in practice central banks generally do not commit. Future theoretical research on forward guidance should therefore take the absence of commitment by central banks into account.
Keywords: Central bank communication, interest rate forecasts, forward guidance, inflation targeting.
JEL classification: E52, E58.
475 - Communication about future policy rates in theory and practice: A Survey
- DNB Working Papers
Date 9 June 2015