The Interest Rate Conditioning Assumption - Tapa blanda

Sinopsis

A central bank's forecast must contain some assumption about the future path for its own policy-determined short-term interest rate. I discuss the advantages and disadvantages of the three main alternatives:

i. Constant from the latest level

ii. As implicitly predicted from the yield curve

iii. Chosen by the monetary policy committee (MPC)

Most countries initially chose alternative (i). With many central banks having planned to raise interest rates at a measured pace in the years 2004-06, there was a shift to (ii). However, Norway, and now Sweden, has followed New Zealand in adopting (iii), and the United Kingdom has also considered this move. So this is a lively issue.

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