Judgement is applied when responding to shocks, and a specific reaction function will only provide a simplified representation of the central bank reaction pattern. Regular information about policy intentions is therefore necessary for the public to learn and revise their expectations. This is also the rationale for forward guidance. In theory, forward guidance may also work as a commitment device and help the central bank stabilise the economy in a more efficient way. 4 The merits of this are debated, and it may be most relevant in a situation where the interest rate has reached a lower bound. Forward guidance about how the central bank plans to reach its targets may nevertheless help establish confidence among agents that the objectives will actually be achieved. Forward guidance may thereby indirectly make an inflation target more credible, and thus contribute to anchoring inflation expectations. For forward guidance to work as intended, there are some preconditions. First, economic agents must indeed understand the announced reaction pattern. A second, and related issue, is that the conditionality of the guidance must be understood. A commonly raised concern is that the public might perceive the guidance as unconditional promises rather than conditional statements. Yet another requirement is that the guidance must affect the agents’ expectations. I will address these issues in more detail when I discuss our experience of forward guidance in Norway. Many central banks started to provide some kind of forward guidance in the late 1990s.
I would particularly like to thank Saba Alam and Will Dowson for their help in preparing this speech. I have received helpful comments from Andrew Bailey, Fabrizio Cadamagnani, Alan Castle, Swati Dhingra, Jonathan Haskel, Neil Kisserli, Catherine Mann, Martin Seneca and Fergal Shortall, for which I am most grateful. 8/8  BIS - Central bankers' speeches