Forward Guidance Risks Stoking Instability, BIS Says

Central banks employing forward guidance risk creating financial instability by revising the policy or keeping borrowing costs low for too long, according to economists at the Bank for International Settlements.

As they seek to foster economic growth, the Federal Reserve, the European Central Bank, the Bank of England and the Bank of Japan have pledged to hold down interest rates to spur lending to households and businesses. Evidence on the effectiveness of the policies is mixed, meaning no firm conclusions can be drawn about their ultimate value, Andrew Filardo and Boris Hofmann argued in a paper published yesterday in the BIS Quarterly Review.