Necessity as the mother of invention monetary policy after the crisis

Table 11. Determinants of changes in central bank communication
Communicated more
Will communicate more
Had internal mandate discussions 0.215* -0.005
(0.119) -0.118
Adopted macro-prudential tools 0.265** -0.067
(0.133) -0.696
Hit by crisis 0.220* -0.059
(0.131) (0.6.12)
Observations 54 38
Pseudo R 2 0.123 0.005
Notes: The table reports marginal effects of an ordered probit model that explains governors’
responses as to the change in central bank communication during the crisis and the expected future
developments. Coefficients are for the highest category (i.e., “much more” and “go even further”).
Numbers in brackets denote robust standard errors. */** identifies statistical significance at the
10%/5% level. Source: Authors’ calculations based on survey among central bank governors
conducted in 2016.
4.4. Forward guidance
The most prominent change in central bank communications has been the more
widespread use of forward guidance (FG), especially when interest rates are constrained
at their (perceived) lower bound. Under FG, the central bank communicates not only about
the current setting of monetary policy, but makes explicit statements about the future path
of policy. While FG predates the crisis, most prominently in New Zealand, it has become
much more common since. The reason is straightforward. Monetary policy works not only
through the current setting of policy instruments, but also through expectations about the
future course of policy, which affects, among other things, the yield curve. Management
of these expectations can therefore be a powerful tool once the central bank has already
lowered short-term rates as much as it can (or wants to).
Academic theories often translate FG into true commitment on behalf of the central bank
(cf. Eggertsson and Woodford, 2003). In the terminology of Campbell et al. (2012), FG is
“Odyssean.” In practice, however, FG does not commit the central bank to anything
(Moessner et al., 2016). Rather, it falls under Campbell et al. (2012)’s classification as
“Delphic,” that is, FG merely forecasts the central bank’s future behavior, with at most a
conditional commitment that depends on macroeconomic developments. Of course,
conveying that conditionality to markets has proven challenging.
Following Filardo and Hofmann (2014), FG can be classified into three different
categories
Qualitative FG does not provide exact indications as to when or under what
conditions the central bank would change its policy rate. For example, in July 2013,
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