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A very interesting way of formulating the choices on the fixed announcement date; I quite like how your description of Mark Carney adding an extra degree of freedom to his decision set. You identified one of the costs in his choice, that being that the BoC has to give back this extra degree of freedom on a future FAD.

But isn't there another cost? Specifically, don't the markets like having a predictable monetary policy absent of surprises. Carney and the BoC are deliberately being ambiguous about their future policy decisions, to give themselves more room to act in the future. But the cost is that the markets are less certain about Carney's future decisions. Perhaps this is appropriate, given that global macroeconomic prospects look uncertain, but don't decisions like this automatically decrease them markets confidence in Carney and the BoC?

Kosta: Thanks!

I'm still getting my head fully around this idea.

Suppose, for example, that the Bank permanently borrowed one degree of freedom from the future, and kept rolling over the loan. It announces at this FAD what the overnight rate target will be at the next FAD. So changes in the overnight rate are never a surprise, at anything less than a 6.5 week horizon. But markets can still be surprised about the Bank's announcement of the future overnight rate.

Half of my mind thinks it would be silly for the Bank to do this. It's equivalent to throwing away the last 6.5 weeks of information. But the other half of my mind says it won't really make any difference, since the overnight rate 6.5 to 13 weeks in the future is probably about as important as the overnight rate 0 to 6.5 weeks in the future.

My brain hurts.

I know just the doctor for that.

Exactly the sketch I had in mind, Stephen!

(I once heard Kevin Dowd say it in a Carleton seminar once, after answering a particularly difficult question!)

Weren't the 2000's the decade with the lowest average nominal rates already? So are you predicting 3% rates for the 2010's then?

I wonder how important these announcements are. I think as long as the credit markets know the relative priorities and rulesets of the CB, they can pretty much predict what will happen -- i.e. perhaps the degrees of freedom are actually much less.

Imagine a scenario where the CB announces that it will follow a certain reaction algorithm, in which case it only has freedom when there is ambiguity in the data. The CB then randomly picks some course of action to resolve the ambiguity. That creates entropy, or uncertainty equal to a small white noise term.

On the other hand, suppose the CB only made one decision each year, but it was completely random in both direction and magnitude.

I claim the second scenario would have more degrees of freedom and more uncertainty for the financial markets. And given the already inherent ambiguity in investing, I can certainly see how the white noise ambiguity of the first scenario is irrelevant to investment decisions.

Maybe the real informational content is to show shifting priorities, or possible changes in the ruleset.

Isn't the BoC simply saying that rates hikes will be slow and ponderous?

As for future interest rates, assuming the inflation target and range do not change, any prediction of lower rates implies that real rates will be lower. Real rates will be lower only if inflation expectations are low and firmly anchored, capital is readily available, and perceived risks of catastrophic events remain low and decrease.

In the meantime, the lead western super-power--the USA--continues to stumble from one hyper-vigilant reaction to another. The USA has lost all credibility on the issue of nuclear proliferation. Nuclear and ambitious colonial power Israel shows no signs of slowing down. There continues to be widespread support in North America for Israel using terrorist tactics to consolidate control over lands taken in the 1967 war of colonial conquest. (Stephen Harper simply reflects his constituents' views on these subjects.) People in North America have no understanding why many in Europe oppose Israeli colonialism. I believe the willingness to kill civilians for land and water will continue to be high.

So will the spectre of regional nuclear war push real interest rates up? Or can western nations continue to kill and take with impunity?

Nick, I think you will be right about interest rates. But here's the tougher forecast: Are we looking at a Japanese-style more than decade long period of sub-one percent interest rates? Will Keynes finally be right? I'd say there's at least a 25% chance of that in the US. I think it is a bit less likely in Canada.

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