COMMUNICATION ABOUT FUTURE POLICY RATES IN THEORY AND PRACTICE: A SURVEY

We discuss the theoretical rationale for central bank communication about future policy rates, either as part of inflation targeting or in the form of forward guidance. We also summarize both actual central bank communication about future policy rates and empirical evidence on the effectiveness of these types of communication. We argue that there is a disconnect between the theory and practice of forward guidance, as theory assumes commitment on the part of 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.     

MACROPRUDENTIAL POLICY – A LITERATURE REVIEW

The recent financial crisis has highlighted the need to go beyond a purely micro approach to financial regulation and supervision. As a consequence, the number of policy speeches, research papers and conferences that discuss a macro perspective on financial regulation has grown considerably. The policy debate is focusing in particular on macroprudential tools and their usage, their relationship with monetary policy, their implementation and their effectiveness. Macroprudential policy has recently also attracted considerable attention among researchers. This paper provides an overview of research on this topic. We also identify important future research questions that emerge from both the literature and the current policy debate.     

Reactions of real yields and inflation expectations to forward guidance in the United States

We study the impact of forward policy rate guidance by the Federal Reserve’s Federal Open Market Committee (FOMC) used as an unconventional monetary policy tool at the zero lower bound of the policy rate on real and breakeven US Treasury yield curves. We find that explicit FOMC policy rate guidance announcements led to a significant reduction in real yields at horizons of 2 to 5 years ahead. By contrast, long-term breakeven inflation rates were little affected, suggesting that inflation expectations have remained well anchored, and that explicit FOMC policy rate guidance has not adversely affected central bank credibility.     

Effects of explicit FOMC policy-rate guidance on equities and risk measures

We quantify the impact of explicit Federal Open Market Committee (FOMC) policy-rate guidance used as an unconventional monetary-policy tool at the zero lower bound of the policy rate on US equity prices, as well as on the risk indicators of credit and CDS spreads, implied volatilities and US equity index risk reversals. We find that explicit FOMC policy-rate guidance announcements at the zero lower bound led to a significant increase in US equity prices, for an aggregate equity index as well as for US commercial bank and US nonfinancial equities. Moreover, we find that they led to a significant reduction in some credit spreads. They also led to a significant reduction in an implied volatility index for US government bonds, as well as in the absolute value of US equity risk reversals, implying a lower perceived risk attached to a large fall in the equity index.     

Effects of asset purchases and financial stability measures on term premia in the euro area

We study the effects of the announcements of ECB asset purchases and of financial stability measures in the euro area in the wake of the global financial crisis and the euro area sovereign debt crisis on 10-year government bond term premia in 11 euro area countries. We find that the term premia of euro area countries with higher sovereign risk, as measured by sovereign CDS spreads, decreased more in response to the announcements of asset purchases and financial stability measures. Term premia of countries with lowest sovereign risk either increased as in Germany, or were not significantly affected or fell slightly, as in the Netherlands and Finland.     

Determinants of Inflation Expectations in the Euro Area

Euro area inflation has been rising strongly in the wake of the COVID-19 pandemic, giving rise to concerns that there could be second-round effects, with higher inflation leading to higher inflation expectations, which in turn lead to higher inflation. This could result in more persistent rises in inflation.

     

International spillovers from US forward guidance to equity markets

We quantify the international spillovers of explicit Federal Open Market Committee (FOMC) policy rate guidance used as an unconventional monetary policy tool at the zero lower bound of the policy rate on international equity markets, considering equity indices of both advanced and emerging economies. We find that stimulatory explicit FOMC policy rate guidance announcements at the zero lower bound led to higher equity prices in a number of advanced and emerging economies. Moreover, we find that equity indices of economies with lower sovereign ratings rose by more, consistent with the risk-taking channel of monetary policy.     

EFFECTIVENESS OF MONETARY POLICY IN SWEDEN

We study whether the sensitivity of Swedish interest rates to domestic economic news was affected by the zero lower bound (ZLB) and forward guidance. We find that the sensitivity was reduced at the ZLB at short but not at longer maturities, suggesting that monetary policy remained effective at longer horizons. Moreover, it was unaffected during a later period of the ZLB/negative policy rates, suggesting that monetary policy remained effective at all horizons then. We also find that the sensitivity of interest rates to domestic news was unaffected by forward guidance, suggesting that market participants understood the conditionality of the forward guidance. (JEL E52, E58)     

Fiscal response to the COVID-19 crisis in advanced and emerging market economies†

The fiscal policy response to the COVID-19 crisis was swift and strong, in tandem with monetary policy. Advanced economies (AEs) deployed a much larger fiscal response than emerging market economies (EMEs) throughout the pandemic. This study focuses on the drivers of this divergent fiscal response in the first months of the pandemic. Apart from the fact that EMEs entered the crisis later than AEs, narrower fiscal policy space in EMEs, further reduced by the tightening of their financing conditions in the early stages of the pandemic, constrained their fiscal response. The size and composition of the fiscal response also depended on some structural factors, such as the level of income, the strength of the social safety nets and automatic stabilisers.