A central bank's forecast must contain some assumption about the
future path for its own policy-determined short-term interest rate.
I discuss the advantages and disadvantages of the three main
alternatives: i. Constant from the latest level ii. As implicitly
predicted from the yield curve iii. Chosen by the monetary policy
committee (MPC) Most countries initially chose alternative (i).
With many central banks having planned to raise interest rates at a
measured pace in the years 2004-06, there was a shift to (ii).
However, Norway, and now Sweden, has followed New Zealand in
adopting (iii), and the United Kingdom has also considered this
move. So this is a lively issue.
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