DP941 Monetary Policy with Flexible Exchange Rates and Forward Interest Rates as Indicators

Author(s): Lars E.O. Svensson
Publication Date: April 1994
Keyword(s): Exchange Rate Policy, Monetary Policy Indicators, Term Structure of Interest Rates
JEL(s): E50, E52, F31, G12
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=941

In the new situation with flexible exchange rates, monetary policy in Europe will have to rely more on indicators than previously under fixed rates. One of the potential indicators, the forward interest rate curve, can be used to indicate market expectations of the time-paths of future short interest rates, monetary policy, inflation rates and currency depreciation rates. The forward rate curve separates market expectations for the short, medium and long term more easily than the standard yield curve. Monetary policy in Germany, France, Sweden, the United Kingdom and the United States is interpreted with the help of forward rates.