by Charles Goodhart
Financial Markets Group, London School of Economics
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:
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.
JEL Codes: G21, G28.
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