Scandinavian Working Papers in Economics

Working Paper Series,
Sveriges Riksbank (Central Bank of Sweden)

No 303: Central bank policy paths and market forward rates: A simple model

Ferre De Graeve () and Jens Iversen ()
Additional contact information
Ferre De Graeve: Research Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden
Jens Iversen: Monetary Policy Department, Central Bank of Sweden, Postal: Sveriges Riksbank, SE-103 37 Stockholm, Sweden

Abstract: Increasingly many central banks announce likely paths for future policy rates. Re- cent experience suggest that market forward rates can differ substantially from those announced. Models commonly adopted in policy analysis ignore such differences. This paper studies a simple model that can capture deviations between announced paths and market forward rates. We detail the macroeconomic transmission of such deviations both in the model and in the data and show how the model can inform policy deliberations.

Keywords: Policy path; forward rate; forward guidance

JEL-codes: E43; E44; E58

51 pages, June 1, 2015

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rap_wp303_150701.pdf PDF-file

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