How Central Banks Can Talk Up Interest Rates And Term Premium
(5 min read)
In the last two decades, central banks have significantly increased communication towards the public in the form of speeches, reports, press conferences, and social media. Moreover, as policy rates have fallen closer to, or through, the zero lower bound (ZLB), central banks’ communication policy has taken on increased importance in influencing interest rate markets.
Despite this, research on the topic has been less forthcoming – a new paper from the European Central Bank (ECB) bucks that trend. The authors, Stephen Hansen, Michael McMahon, and Matthew Tong, analyse the specific channels through which communication affects interest rates. They find that that central banks’ narratives and forecasts around the uncertain economic outlook are especially potent in affecting rates markets.
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