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The Effect of the ECB’s Forward Guidance on Interest Rate Forecasts

Author

Listed:
  • Ralf Fendel
  • Jan Heins
  • Oliver Mohr

Abstract

This study analyzes the impact of forward guidance (FG) by the ECB on the forecast error of financial markets participants regarding the interest rate level and the slope of the yield curve. We refer to OIS (overnight index swap) forwards as the relevant forecasts and purge the prediction error of several macroeconomic and financial variables to gain a pure representation of the exogenous forecast error. To isolate the effect of FG, this study refers to the absolute deviation of forecasts from actual rates and further controls for variables representing unconventional monetary policies. We find that the introduction of FG improved interest rate predictability for shorter maturities while the substantial decline of long-term interest rates has caught markets by surprise. Hence, the ECB’s intended reduction of refinancing rates at the longer end of the interest rate curve came at the cost of lower predictability of the slope of the yield curve.

Suggested Citation

  • Ralf Fendel & Jan Heins & Oliver Mohr, 2020. "The Effect of the ECB’s Forward Guidance on Interest Rate Forecasts," International Journal of Economics and Finance, Canadian Center of Science and Education, vol. 12(8), pages 1-52, August.
    • Handle: RePEc:ibn:ijefaa:v:12:y:2020:i:8:p:52
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    References listed on IDEAS

    as
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    • R00 - Urban, Rural, Regional, Real Estate, and Transportation Economics - - General - - - General
    • Z0 - Other Special Topics - - General

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