Discussion: Gauging the effectiveness of central bank forward guidance by Magnus Andersson and Boris Hofmann Petra Gerlach-Kristen Swiss National Bank

The paper What effect does the publication of an interest rate forecast have? – Predictability of monetary policy given already – Long-term inflation expectations anchored already – Impact on longer-term rates may increase All very nicely done and discussed Bottom line: Publication slightly beneficial 2

Why do we care about longer-term rates? – Standard IS curve – Iterate forward – Substitute out the output gap; only past gap and expected path of inflation and the interest rate matter – Longer-term rates given by expected path of short-term rate plus risk premium 3

Impacting on the longer-term rate By publishing an interest rate forecast – Relies on the expectations hypothesis – Reaction to unexpected movements in the risk premium only at next policy decision By setting policy in terms of the longer rate – Set implementation rate such that desired level of longer-term rate results – Immediate response to risk shocks – Controllability declines with maturity of long rate 4

Practical issues (1) Financial markets make very similar forecasts – Response to publication small – Bayesian updating of estimate of interest rate x periods out with – Important to publish confidence bands 5

Practical issues (2) Publication might help individuals and firms making mortgage and investments decisions – Financial stability concern – No own model to forecast rates – Regulators could require banks to show and explain central bank interest rate forecast – E.g. requirement to explain confidence bands with calculations of interest rate payments at 5 th and 95 th percentile 6

Conclusion We care about long-term interest rates Magnus and Boris show that the publication of the interest rate path impacts on these Financial markets' forecasts similar to central bank's forecast Forecasts probably matter more for individuals and firms – No own model – Confidence bands allow stress tests 7