Business cycles and the expectations of short-term central bank rates in light of Construal Level Theory

Sagi Akron ()
Additional contact information
Sagi Akron: University of Haifa

Eurasian Business Review, 2016, vol. 6, issue 2, No 3, 187 pages

Abstract: Abstract Capital market investors’ capability to forecast the central bank interest rate is critical, since the latter serves as an anchor for many economic transactions. Financial-economics literature shows that the short-term forward rate is a crucial factor considered by investors in the expectation of central bank returns. Yet, it is unclear if the forward rate, a rather abstract measure, is a sufficient predictor—whether a more concrete variable, such as investors’ crisis cycle perceptions, significantly adds explanatory power to the central bank rate expectations. We examine Israeli capital market forecasting of the short-term Central Bank of Israel interest rate, i.e., a 1-to-3-month horizon, during the period 1993–2008. Beyond extracting the forward rate, we create a proxy for crisis business cycle, using local and international capital market performance. This financial setting allows us to examine the Construal Level Theory, where the abstract variable is the forward rate, the concrete variable is the economic crisis, and the construal level is the horizon length. The findings strongly support Construal Level Theory. We show that the expected central bank rate’s reliance on the abstract forward rate becomes more aggressive for longer periods. In addition, the significant positive impact of the economy’s crisis cycle on the short-horizon expected federal fund diminishes in longer horizons. Hence, there is a forecasting substitution effect between the concrete economy crisis and the abstract forward rate in the psychological distance represented by the investment horizon.

Keywords: Central bank interest rate; Capital market forecasting; Business crisis; Construal Level Theory (search for similar items in EconPapers)
JEL-codes: E32 E47 G02 G17 (search for similar items in EconPapers)
Date: 2016
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
http://link.springer.com/10.1007/s40821-016-0043-7 Abstract (text/html)
Access to the full text of the articles in this series is restricted.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:spr:eurasi:v:6:y:2016:i:2:d:10.1007_s40821-016-0043-7

Ordering information: This journal article can be ordered from
http://www.springer.com/economics/journal/40821

DOI: 10.1007/s40821-016-0043-7

Access Statistics for this article

Eurasian Business Review is currently edited by Marco Vivarelli

More articles in Eurasian Business Review from Springer, Eurasia Business and Economics Society Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().