Should Forward Guidance Be Backward-Looking?

Rhys Mendes () and Stephen Murchison

Bank of Canada Review, 2014, vol. 2014, issue Autumn, 12-22

Abstract: When constrained by the zero lower bound, some central banks have communicated a threshold that must be met before short-term interest rates would be permitted to rise. Simulation results for Canada show that forward guidance that is conditional on achieving a price-level threshold can theoretically raise demand and inflation expectations by significantly more than unemployment thresholds. This superior performance is attributable to the fact that the price-level threshold depends on past inflation outcomes. In practice, however, history-dependent thresholds such as this might be more challenging for central banks to communicate.

Date: 2014
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