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Communicating Monetary Policy Intentions - the Case of Norges Bank Amund Holmsen 16 May 2009 (with...
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Transcript of Communicating Monetary Policy Intentions - the Case of Norges Bank Amund Holmsen 16 May 2009 (with...
Communicating Monetary Policy Intentions - the Case of Norges Bank
Amund Holmsen16 May 2009
(with Jan F. Qvigstad, Øistein Røisland and Kristin Solberg-Johansen)
Overview
1. What do we communicate?
2. Interest rate forecasts four years on – a review of pros and cons
3. Challenges
Talking about the future…
“…strong vigilance is therefore of the essence...”(Trichet,
August 2007)
“...and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."
(FED, April 2009)
“...the target overnight rate can be expected to remain at its current level until the end of the second quarter of 2010...”
(BoC, April 2009)
Changes in Norges Bank’s interest rate assumption
2001 - 2002 Constant interest rate
2003 - 2005 Markets’ interest rate expectations …with comments
2005 Our own interest rate forecast
0
1
2
3
4
5
2006 2007 2008 2009 2010 20110
1
2
3
4
5
-3
-2
-1
0
1
2
3
4
5
2006 2007 2008 2009 2010 2011-3
-2
-1
0
1
2
3
4
5
0123456789
2006 2007 2008 2009 2010 20110123456789
0
1
2
3
4
5
6
7
2006 2007 2008 2009 2010 20110
1
2
3
4
5
6
7
90%
70%
50%
30%
Ingredient 1: Baseline scenario (MPR 2/08) Output gap
CPI excl taxes and energy
CPI
Key policy rate
90%
70%
50%
30%
Ingredient 2: Shift scenarios
0123456789
2006 2007 2008 2009 2010 20110123456789
Key policy rate
-3
-2
-1
0
1
2
3
4
5
2006 2007 2008 2009 2010 2011-3
-2
-1
0
1
2
3
4
5Output gap
0
1
2
3
4
5
2006 2007 2008 2009 2010 20110
1
2
3
4
5
CPI x taxes/energy
Higher inflation
Higher inflation
Higher inflation
0
1
2
3
4
5
6
7
8
9
2006 2007 2008 2009 2010 2011
0
1
2
3
4
5
6
7
8
9
MPR 1/08
MPR 2/08
90% 70% 50% 30%
Projected interest rate path
Ingredient 3: Delta accounting of the interest rate path
-2,0
-1,5
-1,0
-0,5
0,0
0,5
1,0
1,5
2,0
08 Q3 09 Q1 09 Q3 10 Q1 10 Q3 11 Q1 11 Q3
-2,0
-1,5
-1,0
-0,5
0,0
0,5
1,0
1,5
2,0
Higher demand in NorwayHigher inflation in NorwayHigher interest rates abroadHigher risk premium in the money marketLower growth abroadChanges in the interest rate path
Reviewing some counter-arguments
Is conditionality misunderstood?
Are policy makers constrained?
Is it possible to decide on a whole path?
0
1
2
3
4
5
6
7
8
2005 2006 2007 2008 2009 2010 2011 2012
The yield curve moves on economic news
Implied forward rates after previous report
Norges Bank forecast
Key policy rate
Implied forward rates day before reportNorges Bank forecast in the previous report
July 2008
Reviewing some counter-arguments
Is conditionality misunderstood?
Are policy makers constrained?
Is it possible to decide on a whole path?
Reviewing some counter-arguments
Is conditionality misunderstood?
Are policy makers constrained?
Is it possible to decide on a whole path?
Reviewing some pro-arguments
Is the reaction function better anchored?
Test 1: Are market rates reasonably aligned with our forecast?
Test 2: Are there smaller jumps in market rates around policy announcements?
a) November 2005
012345678
2006 2007 2008 2009012345678
012345678
2006 2007 2008 2009012345678
012345678
2006 2007 2008 2009 2010012345678
Baseline scenario
Forward rates
b) June 2006
012345678
2007 2008 2009012345678
c) June 2007 d) March 2008
Baseline scenario
Forward rates
Baseline scenario
Forward rates
Baseline scenario
Forward rates
0
10
20
30
40
50
60
70
4.4.01 27.2.02 22.1.03 28.1.04 15.12.04 2.11.05 27.9.06 15.8.07 25.6.08
Change in 12-month LIBOR krone rate from the day of a policy announcement to the following day, and averages for the two periods. Basis points.
Market rates as exogenous assumptions
Interest rate forecasts
Fewer misunderstandings
Easier to talk about the future Exit strategy as integrated part of the
communication
Credible interest rate forecast vs quantitative easing
Reviewing some more pro-arguments
Challenges
Modelling optimal monetary policy
Consistency Over time and accross states of the
economy
Alternative approaches
Simple interest rate rule
rt = rt-1 + (1-)[1(Ett+k-*)+2yt +3yt]
Optimal policy: Minimizing a loss function
L = (π - π*)2 + λy2 + δ(r - r-1)2
Simple rule
rt = rt-1 + (1-)[1(Ett+k-*)+2yt +3yt]
Two approaches Coefficients optimized over unconditional loss Coefficients optimized over conditional loss
We faced the “rules vs discretion” issue and had to take a stand!
-2
-1
0
1
2
3
2006 2007 2008 2009
-2
-1
0
1
2
3
Forward looking Taylor rule vs Timeless
0
1
2
3
4
5
6
7
2006 2007 2008 2009
0
1
2
3
4
5
6
7
0
1
2
3
2006 2007 2008 2009
0
1
2
3Inflation Output gap
Interest rate
Timeless
Timeless Timeless
MPR 2/2006
2k * 2 2t t k t k t k t k 1k 0
L E 0.3y 0.2(i i )
MPR 2/2006
MPR 2/2006
In 2006 we were able to reproduce our forward-
looking Taylor-rule forecast with optimal policy
under timeless perspective with the loss
function:
-2
-1
0
1
2
3
2006 2007 2008 2009 2010
-2
-1
0
1
2
3
Ramsey and Timeless (baseline scenario)
0
1
2
3
4
5
6
7
2006 2007 2008 2009 2010
0
1
2
3
4
5
6
7
0
1
2
3
2006 2007 2008 2009 2010
0
1
2
3
Ramsey
Timeless
RamseyRamsey
Output gap
Key policy rate
Timeless
Timeless
Inflation
-2
-1
0
1
2
3
2006 2007 2008 2009 2010
-2
-1
0
1
2
3
0
1
2
3
4
5
6
7
2006 2007 2008 2009 2010
0
1
2
3
4
5
6
7
0
1
2
3
2006 2007 2008 2009 2010
0
1
2
3
Timeless and Ramsey:- λ=0.30- Weight change in interest rate=0.2
Inflation Output gap
Key policy rateTimeless with different λ’s
λ=0.20
λ=0.20 λ=0.20
Baseline scenario
Baseline scenario
Baseline scenario
λ=0.40
λ=0.40λ=0.40
Current approach: Forecasts, alternative scenarios and ”interest rate account”
Publish loss function (Svensson)
Interest rate rule
Target criterion (Woodford&Giannoni) (π - π*) + θ(y-y-1)=0
Alternative approaches to commitment
The experience is good
The conditionality and the uncertainty in the forecast seem well understood
Monetary policy appears to have become more predictable
The policy discussion is brought closer to the research frontier
Still early. If nothing else – better economists
Conclusions