Tag: central banks

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Deficiency of demand: a global problem

The first link below is to an excellent article by Noriel Roubini, Professor of Economics at New York University’s Stern School of Business. Roubini was one of the few economists to predict the 2008 financial crisis and subsequent recession. In this article he looks at the current problem of substantial deficiency of demand: in other words, where actual output is well below potential output (a negative output gap). It is no wonder, he argues, that in these circumstances central banks around the world are using unconventional monetary policies, such as virtually zero interest rates and quantitative easing (QE).

He analyses the causes of deficiency of demand, citing banks having to repair their balance sheets, governments seeking to reduce their deficits, attempts by firms to cut costs, effects of previous investment in commodity production and rising inequality.

The second link is to an article about the prediction by the eminent fund manager, Crispin Odey, that central banks are running out of options and that the problem of over-supply will lead to a global slump and a stock market crash that will be ‘remembered in a hundred years’. Odey, like Roubini, successfully predicted the 2008 financial crisis. Today he argues that the looming ‘down cycle will cause a great deal of damage, precisely because it will happen despite the efforts of central banks to thwart it.’

I’m sorry to post this pessimistic blog and you can find other forecasters who argue that QE by the ECB will be just what is needed to stimulate economic growth in the eurozone and allow it to follow the USA and the UK into recovery. That’s the trouble with economic forecasting. Forecasts can vary enormously depending on assumptions about variables, such as future policy measures, consumer and business confidence, and political events that themselves are extremely hard to predict.

Will central banks continue to deploy QE if the global economy does falter? Will governments heed the advice of the IMF and others to ease up on deficit reduction and engage in a substantial programme of infrastructure investment? Who knows?

An Unconventional Truth Project Syndicate, Nouriel Roubini (1/2/15)
UK fund manager predicts stock market plunge during next recession The Guardian, Julia Kollewe (30/1/15)

Questions

  1. Explain each of the types of unconventional monetary policy identified by Roubini.
  2. How has a policy of deleveraging by banks affected the impact of quantitative easing on aggregate demand?
  3. Assume you predict that global economic growth will increase over the next two years. What reasons might you give for your prediction?
  4. Why have most commodity prices fallen in recent months? (In the second half of 2014, the IMF all-commodity price index fell by 28%.)
  5. What is likely to be the impact of falling commodity prices on global demand?
  6. Some neo-liberal economists had predicted that central bank policies ‘would lead to hyperinflation, the US dollar’s collapse, sky-high gold prices, and the eventual demise of fiat currencies at the hands of digital krypto-currency counterparts’. Why, according to Roubini, did the ‘root of their error lie in their confusion of cause and effect’?
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The ECB takes the plunge – at last

After promises made back in July 2012 that the ECB will ‘do whatever it takes’ to protect the eurozone economy, the ECB has at last done just that. It has launched a large-scale quantitative easing programme. It will create new money to buy €60 billion of assets every month in the secondary market.

Around €10 billion will be private-sector securities that are currently being purchased under the asset-backed securities purchase programme (ABSPP) and the covered bond purchase programme (CBPP3), which were both launched late last year. The remaining €50 billion will be public-sector assets, mainly bonds of governments in the eurozone. This extended programme of asset purchases will begin in March this year and continue until at least September 2016, bringing the total of asset purchased by that time to over €1.1 trillion.

The ECB has taken several steps towards full QE over the past few months, including €400 billion of targeted long-term lending to banks, cutting interest rates to virtually zero (and below zero for the deposit rate) and the outright purchase of private-sector assets. But all these previous moves failed to convince markets that they would be enough to stimulate recovery and stave off deflation. Hence the calls for full quantitative easing became louder and it was widely anticipated that the ECB would finally embark on the purchase of government bonds – in other words, would finally adopt a programme of QE similar to those adopted in the USA (from 2008), the UK (from 2009) and Japan (from 2010).

Rather than the ECB buying the government bonds centrally, each of the 19 national central banks (NCBs), which together with the ECB constitute the Eurosystem, will buy their own nation’s bonds. The amount they will buy will depend on their capital subscriptions the eurozone. For example, the German central bank will buy German bonds amounting to 25.6% of the total bonds purchased by national central banks. France’s share will be 20.1% (i.e. French bonds constituting 20.1% of the total), Spain’s share will be 12.6% and Malta’s just 0.09%.

Central banks of countries that are still in bail-out programmes will not be eligible to purchase their countries’ assets while their compliance with the terms of the bailout is under review (as is the case currently with Greece).

The risk of government default on their bonds will be largely (80%) covered by the individual countries’ central banks, not by the central banks collectively. Only 20% of bond purchases will be subject to risk sharing between member states according to their capital subscription percentages: the ECB will directly purchase 8% of government bonds and 12% will be bonds issued by European institutions rather than countries. As the ECB explains it:

With regard to the sharing of hypothetical losses, the Governing Council decided that purchases of securities of European institutions (which will be 12% of the additional asset purchases, and which will be purchased by NCBs) will be subject to loss sharing. The rest of the NCBs’ additional asset purchases will not be subject to loss sharing. The ECB will hold 8% of the additional asset purchases. This implies that 20% of the additional asset purchases will be subject to a regime of risk sharing.

As with the QE programmes in the USA, the UK and Japan, the transmission mechanism is indirect. The assets purchased will be from financial institutions, who will thus receive the new money. The bond purchases and the purchases of assets by financial institutions with the acquired new money will drive up asset prices and hence drive down long-term interest rates. This, hopefully, will stimulate borrowing and increase aggregate demand and hence output, employment and prices.

The ECB will buy bonds issued by euro area central governments, agencies and European institutions in the secondary market against central bank money, which the institutions that sold the securities can use to buy other assets and extend credit to the real economy. In both cases, this contributes to an easing of financial conditions.

In addition, there is an exchange rate transmission mechanism. To the extent that the extra money is used to purchase non-eurozone assets, so this will drive down the euro exchange rate. This, in turn, will boost the demand for eurozone exports and reduce the demand for imports to the eurozone. This, again, represents an increase in aggregate demand.

The extent to which people will borrow more depends, of course, on confidence that the eurozone economy will expand. So far, the response of markets suggests that such confidence will be there. But we shall have to wait to see if the confidence is sustained.

But even if QE does succeed in stimulating aggregate demand, there remains the question of the competitiveness of eurozone economies. Some people are worried, especially in Germany, that the boost given by QE will reduce the pressure on countries to engage in structural reforms – reforms that some people feel are vital for long-term growth in the eurozone

The articles consider the responses to QE and assess its likely impact.

Articles

ECB publications

Previous blog posts

Data

Questions

  1. Why has the ECB been reluctant to engage in full QE before now?
  2. How has the ECB answered the objections of strong eurozone countries, such as Germany, to taking on the risks associated with weaker countries?
  3. What determines the amount by which aggregate demand will rise following a programme of asset purchases?
  4. In what ways and to what extent will non-eurozone countries benefit or lose from the ECB’s decision?
  5. Are there any long-term dangers to the eurozone economy of the ECB’s QE programme? If so, how might they be tackled?
  6. Why did the euro plummet on the ECB’s announcement? Why had it not plummeted before the announcement, given that the introduction of full QE was widely expected?
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Deflation danger

The articles linked below look at the dangers of deflation and policies of central banks to counter it.

Deflation in economics has three meanings. The first is falling prices: i.e. negative inflation. The second, more traditional meaning, is a fall in real aggregate demand, resulting in lower output, higher unemployment and lower inflation – and quite possibly an actual fall in the price level. These first two definitions describe what is generally seen as an undesirable situation. The third is a slowing down in the growth of real aggregate demand, perhaps as a result of a deliberate act of fiscal and/or monetary policy. This third meaning could describe a desirable situation, where unsustainable growth is reduced and inflation is reduced from an above-target level.

Here we focus on the first definition. The first two articles look at the dangers of a fall in the price level. The chart below shows falling inflation, although not actually deflation, in China, France, Germany and the UK (click here for a PowerPoint). Several European countries, however, are experiencing actual deflation. These include: Greece, Spain, Hungary, Poland and Sweden. Inflation in the eurozone for 2014 is expected to be a mere 0.5%.

The most obvious danger of deflation (or expected deflation) is that people will delay spending on durable goods, such as cars, furniture and equipment, hoping to buy the items cheaper later. The result could be a fall in aggregate demand and a fall in output and employment.

For retailers, this is all spelling Christmas doom. Already the runup to the most crucial time of the year for shops is being characterised by a game of chicken. Shoppers are wondering how long they can leave their festive buying in the hope of late bargains.

Interest rates may be low, but for people with debts, this is being offset by the fact that inflation is no longer reducing the real value of that debt. For people with credit card debt, personal loans and most mortgages, the interest rate they pay is significantly above the rate of inflation. In other words, the real interest rate on their debt is still significantly positive. This may well discourage people from borrowing and spending, further dampening aggregate demand. And, with a Bank Rate of just 0.5%, there is virtually no scope for lowering the official interest rate further.

At least in the UK, economic growth is now positive – for the time being at any rate. The danger is becoming more serious, however, in many eurozone countries, which are already back in recession or close to being so. The ECB, despite its tentative steps to ease credit conditions, it moving closer to the day when it announces full-blown quantitative easing and buys sovereign bonds of eurozone countries. The Bank of Japan has already announced that it is stepping up it QE programme – a vital ingredient in getting Abenomics back on track and pulling Japan out of its latest recession.

In the USA, by contrast, there is little danger of deflation, as the US economy continues to grow strongly. The downside of this, has been a large rise in consumer debt (but not mortgages) – the ingredients of a possible future bubble and even a new financial crisis.

Forget what central bankers say: deflation is the real monster The Observer, Katie Allen (23/11/14)
Why Deflation Is Such A Big Worry For Europe NPR, Jim Zarroli (31/10/14)
Exclusive: China ready to cut rates again on fears of deflation – sources Reuters, Kevin Yao (23/11/14)
Central Banks in New Push to Prime Pump Wall Street Journal Jon Hilsenrath, Brian Blackstone and Lingling Wei (21/11/14)
Are Central Banks Panicking? Seeking Alpha, Leo Kolivakis (21/11/14)

Questions

  1. What are (a) the desirable and (b) the undesirable consequences of deflation? Does the answer depend on how deflation is defined?
  2. What is meant by a ‘deflationary gap’? In what sense is ‘deflationary’ being used in this term?
  3. Why have oil prices been falling? How desirable are these falls for the global economy?
  4. Is there an optimal rate of inflation? If so, how would this rate be determined?
  5. The chart shows that inflation in Japan is likely to have risen in 2014. This in large part is the result to a rise in the sales tax earlier this year. If there is no further rise in the sales tax, which there will probably not be if Mr Abe’s party wins the recently called election, what is likely to be the effect of the 2014 tax rise on inflation in 2015?
  6. If the Bank Rate is below the rate of inflation, why are people facing a positive real rate of interest? Does this apply equally to borrowers and savers?
  7. In what sense is there a cultural revolution at the Bank of England?
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Forward guidance: managing expectations (update)

Tight fiscal policies are being pursued in many countries to deal with high public-sector deficits that resulted from the deep recession of 2008/9. This has put the main onus on monetary policy as the means of stimulating recovery. As a result we have seen record low interest rates around the world, set at only slightly above zero in the main industrialised countries for the past 4½ years. In addition, there have been large increases in narrow money as a result of massive programmes of quantitative easing.

Yet recovery remains fragile in many countries, including the UK and much of the rest of Europe. And a new problem has been worries by potential investors that loose monetary policy may be soon coming to an end. As the June blog The difficult exit from cheap money pointed out:

The US economy has been showing stronger growth in recent months and, as a result, the Fed has indicated that it may soon have to begin tightening monetary policy. It is not doing so yet, nor are other central banks, but the concern that this may happen in the medium term has been enough to persuade many investors that stock markets are likely to fall as money eventually becomes tighter. Given the high degree of speculation on stock markets, this has led to a large-scale selling of shares as investors try to ‘get ahead of the curve’.

Central banks have responded with a new approach to monetary policy. This is known as ‘forward guidance’. The idea is to manage expectations by saying what the central bank will do over the coming months.

The USA was the first to pursue this approach. In September 2012 the Fed committed to bond purchase of $40bn per month (increased to $85bn per month in January 2013) for the foreseeable future; and record low interest rates of between 0% and 0.25% would continue. Indeed, as pointed out above, it was the ‘guidance’ last month that such a policy would be tapered off at some point, that sent stock markets falling in June.

The Fed has since revised its guidance. On 10 July, Ben Bernanke, the Fed Chairman said that monetary policy would not be tightened for the foreseeable future. With fiscal policy having been tightened, QE would continue and interest rates would not be raised until unemployment had fallen to 6.5%.

Japan has been issuing forward guidance since last December. Its declared aim has been to lower the exchange rate and raise inflation. It would take whatever fiscal and monetary policies were deemed necessary to achieve this (see A J-curve for Japan? and Japan’s three arrows).

Then on 4 July both the Bank of England and the ECB adopted forward guidance too. Worried that growth in the US economy would lead to an end to loose monetary policy before too long and that this would drive up interest rates worldwide, both central banks committed to keeping interest rates low for an extended period of time. Indeed, the ECB declared that the next movement in interest rates would more likely be down than up. Mario Draghi, the ECB president said that the ending of loose monetary policy is ‘very distant’.

The effect of this forward guidance has been to boost stock markets again. The hope is that by managing expectations in this way, the real economy will be affected too, with increased confidence leading to higher investment and faster economic growth.

Update (8/8/13)
With the publication of its August 2013 Inflation Report, the Bank of England clarified its approach to forward guidance. It was announced that Bank Rate would stay at the current historically low level of 0.5% ‘at least until the Labour Force Survey headline measure of unemployment has fallen to a threshold of 7%’. In his Inflation Report Press Conference opening remarks, Mark Carney, Governor of the Bank of England, also stated that:

While the unemployment rate remains above 7%, the MPC stands ready to undertake further asset purchases if further stimulus is warranted. But until the unemployment threshold is reached the MPC intends not to reduce the stock of asset purchases from the current £375 billion.

Nevertheless, the Bank reserved the right to abondon this undertaking under cirtain circumstances. As Mark Carney put it:

The Bank of England’s unwavering commitment to price stability and financial stability is such that this threshold guidance will cease to apply if material risks to either are judged to have arisen. In that event, the unemployment threshold would be ‘knocked out’. The guidance will remain in place only if, in the MPC’s view, CPI inflation 18 to 24 months ahead is more likely than not to be below 2.5%, medium-term inflation expectations remain sufficiently well anchored, and the FPC has not judged that the stance of monetary policy poses a significant threat to financial stability that cannot otherwise be contained through the considerable supervisory and regulatory policy tools of the various authorities. The two inflation knockouts ensure that the guidance remains fully consistent with our primary objective of price stability. The financial stability knockout takes full advantage of the new institutional structure at the Bank of England, ensuring that monetary and macroprudential policies coordinate to support a sustainable recovery. The knock-outs would not necessarily trigger an increase in Bank Rate – they would instead be a prompt for the MPC to reconsider the appropriate stance of policy.

Similarly, it is important to be clear that Bank Rate will not automatically be increased when the unemployment threshold is reached. Nor is 7% a target for unemployment. The rate of unemployment consistent with medium-term price stability – a rate that monetary policy can do little to affect – is likely to be lower than this. So 7% is merely a ‘way station’ at which the MPC will reassess the state of the economy, the progress of the economic recovery, and, in that context, the appropriate stance of monetary policy.

The articles in the updated section below consider the implications of this forward guidance and the caveat that the undertaking might be abondoned in certain circumstances.

Articles

Q&A: What is ‘forward guidance’ BBC News, Laurence Knight (4/7/13)
Forward guidance crosses the Atlantic The Economist, P.W. (4/7/13)
ECB has no plans to exit loose policies, says Benoit Coeure The Telegraph, Szu Ping Chan (25/6/13)
ECB issues unprecedented forward guidance The Telegraph, Denise Roland (4/7/13)
Independence day for central banks BBC News, Stephanie Flanders (4/7/13)
The Monetary Policy Committee’s search for guidance BBC News, Stephanie Flanders (16/7/13)
The Monetary Policy Committee’s search for guidance (II) BBC News, Stephanie Flanders (17/7/13)
Bank of England surprise statement sends markets up and sterling tumbling The Guardian, Jill Treanor and Angela Monaghan (4/7/13)
Forward guidance only works if you do it right Financial Times, Wolfgang Münchau (7/7/13)
Fed’s Forward Guidance Failing to Deliver Wall Street Journal, Nick Hastings (15/7/13)
Talking Point: Thoughts on ECB forward guidance Financial Times, Dave Shellock (11/7/13)
Forward guidance in the UK is likely to fail as the Fed taper approaches City A.M., Peter Warburton (12/7/13)
Forward guidance more than passing fashion for central banks Reuters, Sakari Suoninen (11/7/13)
Markets await Mark Carney’s ‘forward guidance’ The Guardian, Heather Stewart (17/7/13)
Beware Guidance The Economist, George Buckley (25/7/13)

Articles for update
The watered down version of Forward Guidance Reuters, Kathleen Brooks (8/8/13)
Clarity Versus Flexibility at the Bank of England Bloomberg (7/8/13)
Mark Carney’s guidance leaves financial markets feeling lost Independent, Ben Chu (8/8/13)
Bank links interest rates to unemployment target BBC News (7/8/13)
Mark Carney says forward guidance should boost economy BBC News (8/8/13)
The Bank’s new guidance BBC News, Stephanie Flanders (7/8/13)
Uncertainty over BoE guidance lifts sterling to 7-week peak Reuters, Spriha Srivastava (8/8/13)
Bank of England’s guidance is clear, say most economists: Poll The Economic Times (8/8/13)
Britain’s economy: How is it really doing? The Economist (10/8/13)
Markets give thumbs down to Mark Carney’s latest push on forward guidance The Guardian, Larry Elliott (28/8/13)
Carney’s guidance on guidance BBC News, Stephanie Flanders (28/8/13)

Webcasts and podcasts for update
Inflation Report Press Conference Bank of England (7/8/13)
Interest rates to be held until unemployment drops to 7% BBC News, Extracts of Statement by Mark Carney, Governor of the Band of England (7/8/13)
Bank of England links rates to unemployment target BBC News (7/8/13)
Mark Carney: Financial institutions ‘have to change culture’ BBC Today Programme (8/8/13)
Bank of England’s Mark Carney announces rates held BBC News. John Moylan (7/8/13)

Central Bank Statements and Speeches
How does forward guidance about the Federal Reserve’s target for the federal funds rate support the economic recovery? Federal Reserve (19/6/13)
Remit for the Monetary Policy Committee HM Treasury (20/3/13)
Bank of England maintains Bank Rate at 0.5% and the size of the Asset Purchase Programme at £375 billion Bank of England (4/7/13)
Monthly Bulletin ECB (see Box 1) (July 2013)
Inflation Report Press Conference: Opening remarks by the Governor Bank of England (7/8/13)
MPC document on Monetary policy trade-offs and forward guidance Bank of England (7/8/13)
Monetary policy and forward guidance in the UK Bank of England, David Miles (24/9/13)
Monetary strategy and prospects Bank of England, Paul Tucker (24/9/13)

Questions

  1. Is forward guidance a ‘rules-based’ or ‘discretion-based’ approach to monetary policy?
  2. Is it possible to provide forward guidance while at the same time pursuing an inflation target?
  3. If people know that central banks are trying to manage expectations, will this help or hinder central banks?
  4. Does the adoption of forward guidance by the Bank of England and ECB make them more or less dependent on the Fed’s policy?
  5. Why may forward guidance be a more effective means of controlling interest rates on long-term bonds (and other long-term rates too) than the traditional policy of setting the repo rate on a month-by-month basis?
  6. What will determine the likely success of forward guidance in determining long-term bond rates?
  7. Is forward guidance likely to make stock market speculation less destabilising?
  8. Is what ways is the ‘threshold guidance’ by the Bank of England likely to make the current expansionary stance of monetary policy more effective?
  9. Is 7% the ‘natural rate of unemployment’? Explain your reasoning.
Posted on

Forward guidance: managing expectations

Tight fiscal policies are being pursued in many countries to deal with high public-sector deficits that resulted from the deep recession of 2008/9. This has put the main onus on monetary policy as the means of stimulating recovery. As a result we have seen record low interest rates around the world, set at only slightly above zero in the main industrialised countries for the past 4½ years. In addition, there have been large increases in narrow money as a result of massive programmes of quantitative easing.

Yet recovery remains fragile in many countries, including the UK and much of the rest of Europe. And a new problem has been worries by potential investors that loose monetary policy may be soon coming to an end. As the June blog The difficult exit from cheap money pointed out:

The US economy has been showing stronger growth in recent months and, as a result, the Fed has indicated that it may soon have to begin tightening monetary policy. It is not doing so yet, nor are other central banks, but the concern that this may happen in the medium term has been enough to persuade many investors that stock markets are likely to fall as money eventually becomes tighter. Given the high degree of speculation on stock markets, this has led to a large-scale selling of shares as investors try to ‘get ahead of the curve’.

Central banks have responded with a new approach to monetary policy. This is known as ‘forward guidance’. The idea is to manage expectations by saying what the central bank will do over the coming months.

The USA was the first to pursue this approach. In September 2012 the Fed committed to bond purchase of $40bn per month (increased to $85bn per month in January 2013) for the foreseeable future; and record low interest rates of between 0% and 0.25% would continue. Indeed, as pointed out above, it was the ‘guidance’ last month that such a policy would be tapered off at some point, that sent stock markets falling in June.

The Fed has since revised its guidance. On 10 July, Ben Bernanke, the Fed Chairman said that monetary policy would not be tightened for the foreseeable future. With fiscal policy having been tightened, QE would continue and interest rates would not be raised until unemployment had fallen to 6.5%.

Japan has been issuing forward guidance since last December. Its declared aim has been to lower the exchange rate and raise inflation. It would take whatever fiscal and monetary policies were deemed necessary to achieve this (see A J-curve for Japan? and Japan’s three arrows).

Then on 4 July both the Bank of England and the ECB adopted forward guidance too. Worried that growth in the US economy would lead to an end to loose monetary policy before too long and that this would drive up interest rates worldwide, both central banks committed to keeping interest rates low for an extended period of time. Indeed, the ECB declared that the next movement in interest rates would more likely be down than up. Mario Draghi, the ECB president said that the ending of loose monetary policy is ‘very distant’.

The effect of this forward guidance has been to boost stock markets again. The hope is that by managing expectations in this way, the real economy will be affected too, with increased confidence leading to higher investment and faster economic growth.

Articles

Q&A: What is ‘forward guidance’ BBC News, Laurence Knight (4/7/13)
Forward guidance crosses the Atlantic The Economist, P.W. (4/7/13)
ECB has no plans to exit loose policies, says Benoit Coeure The Telegraph, Szu Ping Chan (25/6/13)
ECB issues unprecedented forward guidance The Telegraph, Denise Roland (4/7/13)
Independence day for central banks BBC News, Stephanie Flanders (4/7/13)
The Monetary Policy Committee’s search for guidance BBC News, Stephanie Flanders (16/7/13)
The Monetary Policy Committee’s search for guidance (II) BBC News, Stephanie Flanders (17/7/13)
Bank of England surprise statement sends markets up and sterling tumbling The Guardian, Jill Treanor and Angela Monaghan (4/7/13)
Forward guidance only works if you do it right Financial Times, Wolfgang Münchau (7/7/13)
Fed’s Forward Guidance Failing to Deliver Wall Street Journal, Nick Hastings (15/7/13)
Talking Point: Thoughts on ECB forward guidance Financial Times, Dave Shellock (11/7/13)
Forward guidance in the UK is likely to fail as the Fed taper approaches City A.M., Peter Warburton (12/7/13)
Forward guidance more than passing fashion for central banks Reuters, Sakari Suoninen (11/7/13)
Markets await Mark Carney’s ‘forward guidance’ The Guardian, Heather Stewart (17/7/13)
Beware Guidance The Economist, George Buckley (25/7/13)
UK interest rates held until unemployment falls BBC News (7/8/13)

Central Bank Statements
How does forward guidance about the Federal Reserve’s target for the federal funds rate support the economic recovery? Federal Reserve (19/6/13)
Remit for the Monetary Policy Committee HM Treasury (20/3/13)
Bank of England maintains Bank Rate at 0.5% and the size of the Asset Purchase Programme at £375 billion Bank of England (4/7/13)
Monthly Bulletin ECB (see Box 1) (July 2013)
Inflation Report Press Conference: Opening remarks by the Governor Bank of England (7/8/13)
MPC document on Monetary policy trade-offs and forward guidance Bank of England (7/8/13)
Interest rates to be held until unemployment drops to 7% BBC News, Statement by Mark Carney, Governor of the Band of England (7/8/13)

Questions

  1. Is forward guidance a ‘rules-based’ or ‘discretion-based’ approach to monetary policy?
  2. Is it possible to provide forward guidance while at the same time pursuing an inflation target?
  3. If people know that central banks are trying to manage expectations, will this help or hinder central banks?
  4. Does the adoption of forward guidance by the Bank of England and ECB make them more or less dependent on the Fed’s policy?
  5. Why may forward guidance be a more effective means of controlling interest rates on long-term bonds (and other long-term rates too) than the traditional policy of setting the repo rate on a month-by-month basis?
  6. What will determine the likely success of forward guidance in determining long-term bond rates?
  7. Is forward guidance likely to make stock market speculation less destabilising?