Abstract
We examine the record of the CD Howe’s shadow Monetary Policy Council (SMPC) in Canada. We report a considerable diversity of opinion about the recommended future path of interest rates inside the SMPC. During the period of Bank of Canada forward guidance, market determined forward rates diverge considerably from the recommendations implied by the SMPC. Nevertheless, there is little evidence that the Bank of Canada and the SMPC coordinate their future views about the interest rate path. Finally, changes in views about future changes in policy rates for horizons beyond the next two interest rate decisions are difficult to explain. Our findings imply that there remain challenges in understanding the evolution of future interest rate paths over time. We conclude with some policy implications.
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Notes
At the time of this writing, the CDHI’s SMPC is the only shadow council which aims at providing independent advice about the appropriate stance of the BoC’s monetary policy. Internationally, there are relatively few such shadow committees. To our knowledge, only the UK has two shadow committees. See also Neuenkirch and Siklos (2013) for empirical evidence for the euro area and the UK.
The data used in this study will be made available on the Central Bank Communication Network’s website (http://www.central-bank-communication.net/).
See, for example, https://www.ecb.europa.eu/press/inter/date/2014/html/sp140804.en.html.
The policy rate is the interest rate target on overnight borrowing by major financial institutions. An operating band is permitted around the target which the Bank can control. See http://www.bankofcanada.ca/monetary-policy-introduction/key-interest-rate/.
Complete details about the Bank’s monetary policy strategy can be found at http://www.bankofcanada.ca/monetary-policy-introduction/framework/inflation-control-target/.
Egert (2010) assesses the effects of central bank communication on the exchange rate in South Africa.
Prior to 2013, the BoC’s policy rate announcement was made on Tuesdays. Since then the Bank has been able to release its quarterly Monetary Policy Report (a further four interim updates of which are also published) earlier permitting the simultaneous release. The SMPC discussed the possibility of delaying its own policy rate announcement but chose to retain the Thursday meeting schedule.
Note that the organizations the professional economists on the SMPC represent do publish forecasts which are routinely discussed inside the SMPC.
For a recent analysis of inflation reports and their clarity, see Bulir et al. (2013).
It is conceivable that the Governing Council was created by former Governor Gordon Thiessen in reaction to the so-called Manley Report (see Manley and Dorin 1992) which essentially concluded that, when it comes to BoC governance, “if it ain’t broke, don’t fix it”. Also, see Laidler (1991). For a recent study of the determinants and consequences of transparency in monetary policy committees, see Hayo and Mazhar (2013).
The current and past membership of the SMPC can be found at http://www.cdhowe.org/monetary-policy-council-2 while the Bank’s current GC membership is available at http://www.bankofcanada.ca/about/corporate-governance/governing-council/.
Bill Robson, President of the C.D. Howe, who created and Chairs the SMPC, also wrote to us that “…reputation in the relevant field of analysis was a key criterion.” He also goes on to add, in private correspondence with us: “…it has always seemed more congenial to have our academic members be from different institutions and our business members be from different companies.” Finally, he adds: “…former senior BoC [Bank of Canada] employees, though extensively consulted over the SMPC’s mandate and operations, have never been invited to join it.”
Notably, the Globe and Mail (http://www.theglobeandmail.com/) and the National Post (http://www.nationalpost.com/index.html).
Another distinction is whether the path is purely model-driven or represents the views of the policy making committee members. Several authors (e.g., Kool and Thornton 2012; Karagedikli and Siklos 2013, and references therein) examine the impact of forward interest rate paths on yields and the exchange rate. The evidence of forward guidance on financial market returns is decidedly mixed.
He (2010) found that the policy did move yields in the desired direction, as did Siklos and Spence (2010), while Siklos and Neuenkirch (2014) examined the effect of the BoC’s conditional commitment on the CDHI’s SMPC current policy rate recommendation. They conclude that the conditional commitment has a significantly larger negative effect on the SMPC’s recommendation than on the policy rate set by the GC itself.
The Fed has the advantage in this context of being able to rely on its dual mandate to maintain price stability while striving to support an economy that operates at capacity.
The dove is defined as the SMPC member who recommends the lowest policy rate for the BoC for the upcoming overnight rate setting by the Bank. Obviously, the most hawkish member recommends the highest policy rate. There can be more than one dove or hawk at the conclusion of an SMPC meeting. Also, the individual labelled as dove or hawk can, and does of course, change over time.
Siklos and Neuenkirch (2014) find, in case of the proposal for the upcoming meeting, that differences between the SMPC and GC are partly driven by the fact that the former assumes a higher steady state real interest rate than the latter. In contrast, there are few differences in both committees’ responses to inflation and output shocks.
Undoubtedly, the BoC garners relatively more public attention than the SMPC. Whether this affects the empirical results in this paper or not remains unclear. Nevertheless, as previously mentioned, the SMPC’s recommendations are regularly discussed in the Canadian media.
12-month ahead recommendations are published since January 2010. The resulting small sample (28 observations) makes it unattractive to utilize these data.
Unfortunately, we are unable to obtain a long enough sample for a 6 months ahead BA yield.
Bankers’ acceptances are short-term obligations that are accepted by banks such that there is a guarantee of repayment of principal and interest. For additional details, see http://www.m-x.ca/f_publications_en/BA_en.pdf.
To conserve space, detailed variable definitions are relegated to an unpublished appendix available on request.
Note that forecasting the BoC in the post-conditional commitment period is not feasible since there is no variation in the policy rate.
The sole exception is the interest rate paths recommended by SMPC doves when considering the full sample period.
One obvious difference between the BoC and the Fed studied by Blinder (2004) is that the former follows a numerical inflation target while the latter central bank did not at the time. Differences in outlook (both inflation and real GDP growth, among other variables) could also be a factor resulting in biased forecasts.
As part of our robustness tests, we include the contemporaneous inflation gap in Eq. (2). However, this variable is insignificant in all three specifications. This can be seen as evidence that SMPC members react rather to changes in forward-looking variables than to the contemporaneous inflation gap.
As part of our robustness tests, we include the contemporaneous absolute inflation gap in Eq. (3). However, this variable is insignificant in all three specifications. Consequently, current deviations from target do not significantly increase the diversity of opinions within the SMPC.
For instance, Bhattacharjee and Holly (2010) analyze committee behaviour within the BoE’s Monetary Policy Committee. Such a more detailed analysis of committee decision‐making in the context of forward guidance would be an interesting point for future research.
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Research for this paper was carried out in part while the first author visited the Viessmann Centre. Siklos gratefully acknowledges financial assistance from a CIGI-INET research grant. Comments on an earlier draft by three anonymous referees, Ted Carmichael, Stephen Ferris, Stéphane Marion, Avery Shenfeld, and George S. Tavlas (the Editor) are much appreciated. An earlier version was presented at the 2014 Public Choice Society Conference in Charleston, SC. The first author has been a member of the C.D. Howe’s Monetary Policy Council (SMPC) since 2008 (the SMPC exists since 2002) but receives no direction or funding from the C.D. Howe for participating in this group. All members of the SMPC, including the second author, provide an independent opinion on monetary policy issues.
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Neuenkirch, M., Siklos, P.L. When is Lift-Off? Evaluating Forward Guidance from the Shadow. Open Econ Rev 25, 819–839 (2014). https://doi.org/10.1007/s11079-014-9328-6
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DOI: https://doi.org/10.1007/s11079-014-9328-6
Keywords
- Bank of Canada
- Central bank communication
- Forward guidance
- Monetary policy committees
- Shadow councils
- Taylor rules