Do central banks respond timely to developments in the global economy?

Our analysis suggests; they do not! To arrive at this conclusion we construct a real-time
data set of interest rate projections from central banks in three small open economies;
New Zealand, Norway, and Sweden, and analyze if revisions to these projections (i.e.,
forward guidance) can be predicted by timely information. Doing so, we find a systematic
role for forward looking international indicators in predicting the revisions to the interest
rate projections in all countries. In contrast, using similar indexes for the domestic
economy yields largely insignificant results. Furthermore, we find that revisions to
forward guidance matter. Using a VAR identified with external instruments based on
forecast errors from the predictive regressions, we show that the responses to output,
inflation, the exchange rate and asset returns resemble those one typically associates
with a conventional monetary policy shock.