Taking a Look at Forward Guidance

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The Governor of the Bank of England Mark Carney implemented a strategy called ‘forward guidance’. He does not want high interest rate until the unemployment rate has fallen to 7%or below and the criteria including a quantitative project of inflation should be less than 2.5% in the medium term. The theory of forward guidance is actually a promise of future interest rate set by the central bank. It has been an important part of monetary policy; so it said to rescue UK economy by apply this policy. This tool is using in US and Canada in this moment. Therefore, we already have a guideline to look at before the central bank goes wrong.
In this essay, first I will state the definition of forward guidance and what is the point using this policy. Secondly, I will discuss the advantages and a disadvantage in this policy. Thirdly, using economic models to explain how to maintain low interest rate and the relationship between unemployment rate and inflation rate. Moreover, there is some empirical evidence of forward guidance. Finally, I will sum up the point we have discussed.

To start with a definition of Forward guidance, it is a tool that the central bank exercises its power in monetary policy with their own forecast, in order to get the market expectations of future level of interest rates. This is a way of converting low short-term interest rates into lower long-term interest rates; the tradition reaction function will not affect the interest rate. Central banks are trying to
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