Language after liftoff: Fed communication away from the zero lower bound

Feroli, Michael; Greenlaw, D.; Hooper, Peter; Mishkin, Frederic S.; Sufi, Amir

doi:10.1016/j.rie.2017.04.003

Cited by 32 publications

(31 citation statements)

References 18 publications

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“…This has been documented by Swanson and Williams (2014a) and Feroli et al (2016) for the United States, and by Swanson and Williams (2014b) for the UK and Germany.…”

Section: The Responsiveness Of Bond Yields To Macroeconomic Surprisesmentioning

confidence: 87%

Communication of Monetary Policy in Unconventional Times

et al. 2017

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Monetary policy communication is particularly important during unconventional times, because high uncertainty about the economy, the introduction of new policy tools and possible limits to the central bank's toolkit could hamper the predictability of policy actions. We study how monetary policy communication should and has worked under such circumstances. Our main results relate to announcements of asset purchase programmes and the use of forward guidance. We show that announcements of asset purchase programmes have lowered market uncertainty, particularly when accompanied by a contextual release of implementation details such as the envisaged size of the programme. We also show that forward guidance reduces uncertainty more effectively when it is state-contingent or when it provides guidance about a long horizon than when it is open-ended or covers only a short horizon, and that the credibility of forward guidance is strengthened if the central bank also has embarked on an asset purchase programme. Non-technical summaryCommunication can help making central banks transparent and thereby contribute to their accountability and to the management of expectations of economic agents. While these roles are generally important, they become even more relevant in unconventional times, when central banks need to explain the rationale and the workings of the various new policy tools that they employ, when the public will want to understand how the central bank will use the new tools, and how the central bank will eventually want to exit from using these tools. Managing expectations of economic agents about the future course of monetary policy is therefore essential in such circumstances, also because under a situation of elevated uncertainty, the central bank should strive to minimize any uncertainty about its own behaviour, to the extent possible.Looking back at several years of experience with unconventional monetary policies in several economies, this paper provides an assessment of the effects and effectiveness of central bank communication during unconventional times. The focus of the paper is on the role of clarity in central bank communication, both when it comes to announcing new policy tools and when using forward guidance. The paper shows that communication about new policy tools reduces market uncertainty in particular when the announcements provide information about the envisaged size of a programme. With regard to forward guidance, clarity can be achieved by stressing the statedependency of the central bank's reaction function. In line with this reasoning, the paper shows that forward guidance is more effective in managing expectations when it is state-contingent or when it provides guidance about a long horizon than when it is open-ended or covers only a short horizon. In addition, the credibility of forward guidance seems to be considerably enhanced if the central bank simultaneously has an asset purchase programme in place.The findings of this paper have implications for monetary policy communicatio...

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“…This has been documented by Swanson and Williams (2014a) and Feroli et al (2016) for the United States, and by Swanson and Williams (2014b) for the UK and Germany.…”

Section: The Responsiveness Of Bond Yields To Macroeconomic Surprisesmentioning

confidence: 87%

Communication of Monetary Policy in Unconventional Times

et al. 2017

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“…Feroli et al . () also highlight the fact that time‐based FG should be used in only very unusual circumstances. Coenen and Ehrmann () find that FG reduces uncertainty more effectively when it is state‐dependent (or when it provides guidance about a long horizon).…”

Section: Introductionmentioning

confidence: 94%

State-Dependent Forward Guidance and the Problem of Inconsistent Announcements

Parra-Polanía

2019

German Economic Review

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Forward guidance can be provided as an unconditional promise, i.e. commitment to a specific low policy rate. Alternatively, the promise may include an escape clause, i.e. a condition defining the state of the economy under which the central bank would not keep such a low rate and, instead, it would revert to setting policy under discretion. The escape clause can be expressed as a threshold in terms of a specific variable. The present paper shows that, when such a threshold is expressed in terms of an endogenous variable (e.g. output, inflation), there are cases where it becomes impossible for the central bank to act in a way that is consistent with its promise. Consistency imposes limits on the policy rate that can be set since reverting immediately to the optimal discretionary rate can be incompatible with exceeding the threshold.

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“…Does empirical evidence support the theory that time‐based forward guidance leads to bad expectation dynamics because it leads to interest rates becoming insensitive to macroeconomic news? Feroli et al () find that the answer is yes. Using the methodology developed by Swanson and Williams (), they evaluate how responsive interest rates were to economics news during periods when the Federal Reserve used time‐based forward guidance, data‐based forward guidance, or no forward guidance at all.…”

Section: How Can Monetary Policy Discretion Be Made More Rule‐like?mentioning

confidence: 99%

“…Time‐based forward guidance not only leads to less sensitivity to macroeconomic news than does data‐based forward guidance, but also it leads to less sensitivity than when there is no forward guidance at all. Indeed, the results in Feroli et al () indicate that, even without forward guidance, markets are able to glean some information about the monetary policy reaction process, and this is an improvement over time‐based forward guidance.…”

Section: How Can Monetary Policy Discretion Be Made More Rule‐like?mentioning

confidence: 99%

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Improving the use of discretion in monetary policy

Mishkin

2018

International Finance

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This paper argues that the rules versus discretion debate has been miscast because a central bank does not have to choose only between adopting a policy rule versus pure discretion, both of which have serious shortcomings. Rather, it can choose a constrained discretionary regime that has rule‐like attributes. To make monetary policy discretion more rule‐like, it can be improved by (1) adopting a nominal anchor such as an inflation target, a monetary‐policy strategy that has proved to be very successful in recent years, and (2) communication of a monetary‐policy reaction process, especially through data‐based forward guidance, in which the monetary‐policy authorities describe how the future policy path will change as economic circumstances change.

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Language after liftoff: Fed communication away from the zero lower bound

Cited by 32 publications

References 18 publications

Communication of Monetary Policy in Unconventional Times

Communication of Monetary Policy in Unconventional Times

State-Dependent Forward Guidance and the Problem of Inconsistent Announcements

Improving the use of discretion in monetary policy

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