Transparency and Predictability in Monetary Policy

Abstract

By being open about its policy response pattern, the central bank allows economic agents to understand the implementation of monetary policy. They will then be able to anticipate the central bank's interest rate decisions to a fairly large extent. Transparency and predictability can contribute to strengthening monetary policy credibility and enhance its effectiveness. This article assesses the predictability of Norges Bank’s interest rate setting since 1999, and includes a comparison with a number of other countries. Changes in money market rates after the monetary policy meetings are used as an indication of whether the decisions surprised market participants. The study indicates that interest rate decisions in Norway have surprised market participants somewhat more than in other countries, particularly in 2001. This may be because the economic situation has been fairly different in Norway compared with other countries. In addition, the inflation target was introduced relatively recently in Norway. Over time, however, it is the actual inflation developments that are decisive for monetary policy credibility. Long-term indicators show that inflation expectations in Norway are close to the inflation target.