The other side of forward guidance: Are central banks constrained by financial markets?

Matthieu Picault and Louis Raffestin

Finance Research Letters, 2020, vol. 36, issue C

Abstract: We present a theoretical model in which the central bank cares about the short-term stability of financial markets, which gives it an incentive to keep market expectations about future rates at a low level. This incentive is stronger when financial institutions are perceived to be fragile, because the impact on financial stability of a rise in rate expectations is higher in that context. Empirically, both the long-term target of the central bank and the short-term health of the financial sector are strong predictors of the evolution of US Treasury notes rates between two central bank meetings.

Keywords: Forward guidance; Central bank; Financial stability; Market expectations (search for similar items in EconPapers)
JEL-codes: D40 D84 F31 G15 (search for similar items in EconPapers)
Date: 2020
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Citations: View citations in EconPapers (1)

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Working Paper: The other side of forward guidance: Are central banks constrained by financial markets? (2020)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finlet:v:36:y:2020:i:c:s1544612319301321

DOI: 10.1016/j.frl.2019.101324

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