Central Bankers Prisoner of Policy Guidance: Cutting Research

Central banks should be careful what they say about the future if they want flexibility to set monetary policy.

Policy makers can become “constrained” when they inform investors about the likely direction of interest rates, according to economists Nikola Mirkov of the University of St. Gallen and Norges Bank’s Gisle James Natvik. The topic is a hot issue at the moment as central bankers, including Federal Reserve Chairman Ben S. Bernanke, embrace so-called forward guidance to enhance the power of interest rates in providing stimulus.