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Forward guidance and the predictability of monetary policy: a wavelet‐based jump detection approach
Author(s) -
Winkelmann Lars
Publication year - 2016
Publication title -
journal of the royal statistical society: series c (applied statistics)
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.205
H-Index - 72
eISSN - 1467-9876
pISSN - 0035-9254
DOI - 10.1111/rssc.12119
Subject(s) - predictability , wavelet , jump , monetary policy , econometrics , computer science , economics , representation (politics) , mathematics , statistics , macroeconomics , artificial intelligence , law , physics , quantum mechanics , politics , political science
Summary The publication of a projected path of future policy decisions by central banks is a controversially debated method to improve monetary policy guidance. The paper proposes a new approach to evaluate the effect of the guidance strategy on the predictability of monetary policy. The empirical investigation is based on jump probabilities of Norwegian interest rates on announcement days of the Norges Bank before and after the introduction of quantitative guidance. Within the standard semimartingale framework, we propose a new methodology to detect jumps. We derive a representation of the quadratic variation in terms of a wavelet spectrum. An adaptive threshold procedure on wavelet spectrum estimates aims at localizing jumps. Our main empirical result indicates that quantitative guidance significantly improves the predictability of monetary policy.