Policy Article

Can forward guidance be ambiguous yet effective?


  • Floro
  • D.
  • Tesfaselassie
  • M.
Publication Date

In the recent financial crisis unconventional monetary policy, in the form of forward guidance and quantitative easing, has taken center stage. Recent moves in financial markets have challenged the notion that forward guidance can be separated from the unwinding of quantitative easing and shown that forward guidance can have perverse effects on market expectations. In an attempt to make sense of these developments, the authors Danvee Floro and Mewael F. Tesfaselassie discuss the theory and practice of unconventional monetary policy. They argue that, caution on the part of central banks has led to policy ambiguity in communication, as manifested by the insertion of conditionality and/or by the expression of intent, belief etc., rather than commitment, to maintain accommodative policy on a certain course. Setting aside whether caution is warranted or not, vagueness seems to be driven mainly by central banks’ unwavering commitment to price stability, a commitment which is credible owing to their hard won reputation.