Forward guidance loses power when rates rise, RBI research finds

Tool is useful at lower bound but is much less effective during normal conditions, paper argues

The Reserve Bank of India
Nichalp/Wikimedia Commons

Forward guidance loses potency when policy rates rise above highly accommodative, research from the Reserve Bank of India finds.

When Circumspection is the Better Part of Communication, by Michael Debabrata Patra, Indranil Bhattacharyya and Joice John, argues the method “loses its relevance” in a policy-tightening cycle.

The usefulness of forward guidance is “unambiguously proven,” the researchers say, at “very low policy rates” where it can influence long-term interest rate expectations. “The

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