Essays on forward guidance
Author
Akkaya, Yıldız
Advisor
Gürkaynak, Refet S.
Date
2014Publisher
Bilkent University
Language
English
Type
ThesisItem Usage Stats
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Show full item recordAbstract
This dissertation consists of three essays on forward guidance, central bank
verbal guidance on future policy rates, and shows how economies respond to
it both theoretically and empirically.
In the first essay the effects of forward guidance on real economy through
interest rate uncertainty is studied as explicit numerical guidance lowers the
uncertainty around future interest rates. To analyze the effects of such a policy
a New Keynesian model framework incorporating interest rate uncertainty is
developed. The results show that a decrease in the uncertainty of interest rates
is expansionary in its own right, independent of the level of interest rates the
central bank commits to. Thus, distinct from the literature, a new channel for
the effectiveness of forward guidance is suggested.
The second essay studies the question of whether the optimal amount of interest
rate uncertainty is always zero, or whether monetary policy makers may
benefit from an increase in the uncertainty. For this purpose a two-country
open economy New Keynesian model with interest rate uncertainty is developed, and the effects of interest rate uncertainty on capital flows and exchange
rates are studied. The results emphasize that the impact of an increase in the
volatility of interest rate mimics the impacts of an increase in the level of the
interest rate, and this suggests that uncertainty about the policy rate path can
be used by the central bank as a policy tool.
The third essay is empirical, and analyses the sensitivity of the interest
rates of various maturities to monetary policy uncertainty, which depends on
the language used in the monetary policy statements. To measure market
responses to the announcements, I first calculate monetary policy surprises and
uncertainty surprises by using Federal Funds Futures and Eurodollar Options,
respectively. In the event-study analysis it is shown that the reduction in the
variability of monetary policy rate expectations due to the explicit content of
the statements, has significant effect on the long-term treasury notes.
Keywords
Forward guidanceMonetary policy
Volatility shocks
New Keynesian models
Monetary policy surprises
Event study methodology