Skip to main content

Fourth Quarter 2015, 
Vol. 97, No. 4
Posted 2015-12-07

How Effective Is Central Bank Forward Guidance?

by Clemens J.M. Kool and Daniel L. Thornton

This article investigates the effectiveness of forward guidance for the central banks of New Zealand, Norway, Sweden, and the United States. The authors test whether forward guidance improved market participants’ ability to forecast future short-term and long-term rates relative to several benchmarks. They find some evidence that forward guidance improved market participants’ ability to forecast short-term rates over relatively short forecast horizons for New Zealand, Norway, and Sweden but not the United States. However, the effects are typically small and frequently not statistically significant. Moreover, in no case are the results uniform across the benchmarks used. In addition, the authors find evidence of convergence of survey forecasters for New Zealand but less so for the other countries and no evidence of convergence for the United States.