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Central Bank Communications By C.A.E. Goodhart Financial Markets Group London School of Economics

Central Bank Communications By C.A.E. Goodhart Financial Markets Group London School of Economics. Background

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Central Bank Communications By C.A.E. Goodhart Financial Markets Group London School of Economics

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  1. Central Bank Communications By C.A.E. Goodhart Financial Markets Group London School of Economics

  2. Background • Central Bank’s forecasts, e.g. of its own future interest rates [Goodhart and Lim, IJCB, 2011], or of unemployment, etc., are not good, (though no worse than others), outside the relatively short-term future. No crystal ball; no reason to believe such forecasts are better than, say, those of the market beyond a short horizon. • The form of a Central Bank’s communication is considerably influenced by the structure and form of its decision-making process:- • Single Governor, • Small CB Management team, • Committee with externals. • Collegial vs Individualistic.

  3. What can be communicated?

  4. Forward Guidance Contra: Forecasts unreliable [Reaction function changes]. So either, a) Take wrong policy, or B) Renege Revealed preference is (b), so limited credibility. Pro: Clarity and Reach of communication.

  5. Conclusion Despite weaknesses, will be done in foreseeable future. Rationale: To limit upwards move in long rates as short rates re-normalise. N.B. Will not have much effect on bets about date of first move, though communication of reaction function may have limited effect.

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