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Forward guidance and the predictability of monetary policy: a wavelet-based jump detection approach

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  • Lars Winkelmann

Abstract

type="main" xml:id="rssc12119-abs-0001"> The publication of a projected path of future policy decisions by central banks is a controversially debated method to improve monetary policy guidance. The paper proposes a new approach to evaluate the effect of the guidance strategy on the predictability of monetary policy. The empirical investigation is based on jump probabilities of Norwegian interest rates on announcement days of the Norges Bank before and after the introduction of quantitative guidance. Within the standard semimartingale framework, we propose a new methodology to detect jumps. We derive a representation of the quadratic variation in terms of a wavelet spectrum. An adaptive threshold procedure on wavelet spectrum estimates aims at localizing jumps. Our main empirical result indicates that quantitative guidance significantly improves the predictability of monetary policy.

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  • Lars Winkelmann, 2016. "Forward guidance and the predictability of monetary policy: a wavelet-based jump detection approach," Journal of the Royal Statistical Society Series C, Royal Statistical Society, vol. 65(2), pages 299-314, February.
    • Handle: RePEc:bla:jorssc:v:65:y:2016:i:2:p:299-314
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    File URL: http://hdl.handle.net/10.1111/rssc.2016.65.issue-2
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    Cited by:

    1. I A Eckley & G P Nason, 2018. "A test for the absence of aliasing or local white noise in locally stationary wavelet time series," Biometrika, Biometrika Trust, vol. 105(4), pages 833-848.
    2. Jianhao Lin & Jiacheng Fan & Yifan Zhang & Liangyuan Chen, 2023. "Real‐time macroeconomic projection using narrative central bank communication," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 38(2), pages 202-221, March.
    3. Jakub Rybacki, 2019. "Does Forward Guidance Matter in Small Open Economies? Examples from Europe," Econometric Research in Finance, SGH Warsaw School of Economics, Collegium of Economic Analysis, vol. 4(1), pages 1-26, June.

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