Central Bank Forecasts Research Articles

Central bank transparency and shocks

According to the literature, in an expectations-augmented Phillips curve model, opacity is always preferred to transparency on central bank forecasts. By modelling the private sector's behavior explicitly, we show that transparency reduces the shocks. Consequently, transparency can be preferred.

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Aggregate shock and monetary policy regimes

We study monetary policy transparency with regard to publication of central bank forecasts of the future state of the economy in the New Keynesian framework. The central bank has private information about the future aggregate shock. We compare two possible monetary policy regimes, transparent and opaque. The ex-ante welfare level is higher under the opaque regime, in which the central bank does not release its forecast. This is due to smoother consumption over the business cycle. We demonstrate that the welfare difference between the two regimes increases with the degree of monopoly power in the intermediate sector. In particular, the welfare difference vanishes when the intermediate sector is perfectly competitive. We also show that the welfare difference increases with the accuracy of information possessed by the central bank, and the welfare difference disappears when the central bank has no information advantage over the private sector about the economy. And, finally, we establish that the welfare difference increases with the level of shock fluctuations.

Announcements and the Role of Policy Guidance

By providing guidance about future economic developments, central banks can affect private sector expectations and decisions. This can improve welfare by reducing private sector forecast errors, but it can also magnify the impact of noise in central bank forecasts. 

The Value of Publishing Official Central Bank Forecasts

The aim of the present analysis is to shed light on the question whether Central Banks should publish their macroeconomic forecasts, and what could possibly be gained in monetary policy if they did so. We show that disclosing the Central Bank's assessment of the prevailing inflationary pressures in the form of a forecast improves macroeconomic performance even if this assessment is imprecise. This is because it makes policy more predictable. We are also interested in finding out the useful content of the forecasts, if published, and answering the question whether it makes a difference if these official forecasts are in the sense of incorporating the Central Bank's forecasts of its own policy as well, or on some other policy assumption. Possible conditional alternatives may include assuming unchanged instruments, however specified, or assuming the kind of policy that the private sector is estimated to expect. The analysis comes out in favour of publishing unconditional forecasts, which reveal the intended results of monetary policy. A discussion of some practical issues related to publishing official macroeconomic forecasts is also provided.

VELOCITY FUTURES MARKETS: DOES THE FED NEED A STRUCTURAL MODEL?

I. INTRODUCTION During the 1990s, the concept of inflation targeting caught on among both monetary theorists and monetary policy makers. This interest took several forms. Some advocated a backward-looking approach (as exemplified by the Taylor rule), which would require central bankers to offset shocks that had driven inflation away from its target path. Others advocated a forward-looking approach whereby the central bank would target the forecast, that is, set policy in such a way that the optimal forecast of inflation was exactly equal to its target value. This forward-looking strategy could use either central bank or private forecasts of inflation. Some of those who advocated a forward-looking strategy based on private forecasts went so far as to suggest that such a policy would eliminate any need for the central bank to develop a structural model of the economy. Bernanke and Woodford (1997) criticized this line of analysis by suggesting that due to problems related to circularity and indeterminacy (or solution multiplicity (1)), a policy of targeting the forecast was not likely to be effective. In this article we argue that because the circularity problem can be easily remedied, a private forecast-based policy is feasible and central banks do not need a structural model of the economy. II. THE CIRCULARITY PROBLEM Because monetary policy impacts the price level with a long and variable lag, it is not surprising that many economists have looked for ways of incorporating private-sector forecasts into the monetary policy making process. Taken to its logical extreme, such an approach would require the central bank to adjust its policy instrument until the private sector's forecast of inflation, for instance, was equal to the target value. At first glance, the idea of replacing a bureaucratic decision-making process with a simple rule based on rational expectations and efficient markets theory has great intuitive appeal. Bernanke and Woodford, however, showed that there is a circularity problem associated with attempts to target private-sector forecasts of inflation (or any other goal variable). If a policy of targeting the forecast were credible and effective, then at each and every point in time the market would expect the future price level to be equal to its target value. But in that case private-sector forecasts would be uninformative, that is, they would be unable to provide the monetary authority with information about economic shocks that might impact the price level, and thus would provide no guidance as to how the monetary authority could use its tools to offset those shocks. On closer inspection, it turns out that there are a number of distinct issues entangled in the general circularity problem. For instance, does the problem apply only to private-sector forecasts or to central bank forecasts as well? And are there ways of developing private-sector forecast-based policy rules that are not susceptible to the circularity problem? If the answer is yes, what does this imply about the widely held view that monetary authorities need to base policy on their own internal, structural models of the economy? Svensson (1997) suggested that his inflation forecast targeting proposal was not susceptible to the circularity problem because it relied on internal central bank forecasts, not private-sector forecasts. Bernanke and Woodford, however, showed that the effectiveness of Svensson's proposal was based on the fact that central bank forecasts were derived from a structural model of the economy and that the distinction between internal and external forecasts was essentially meaningless for the circularity problem. If the problem is not private-sector forecasts per se, then the next question is whether it is possible to set up a policy targeting rule based on private-sector forecasts that avoids the circularity problem and also minimizes the need for the central bank to rely on a structural model of the economy. …

Central Bank forecasts and disclosure policy: Why it pays to be optimistic

In a model with forward-looking behavior, we study disclosure policy when a central bank has private information on the future state of the economy. We find that the effects of advance disclosure depend on the presence of uncertainty about policy targets when the shock occurs. With uncertainty about policy targets, disclosure is harmless to current outcomes, owing to the strong dependence of inflation expectations on policy actions, which induces the central bank to focus exclusively on price stability. If the central bank's targets are common knowledge, disclosure of future shocks impairs stabilization of current inflation and output.

Is the central bank's publication of economic forecasts influential?

We examine how a central bank's economic forecasts affect forecasts by professional forecasters and vice versa. Results show that while central bank forecasts are not significantly influenced by those of professional forecasters, the latter are however notably affected by the former.

How Forecasts Evolve - The Growth Forecasts of the Federal Reserve and the Bank of England

We investigate how central bank forecasts of GDP growth evolve through time, and how they are adapted in the light of official estimates of actual GDP growth. Using data for 1988–2005, we find that the Federal Open Market Committee (FOMC) has typically adjusted its forecast for growth over the coming four quarters by about a third of the unexpected component of estimated growth in the four quarters most recently ended. We were unable to find any clear signs of systematic errors in the FOMC's forecasts. UK data for 1998–2005 suggest that the Bank of England Monetary Policy Committee (MPC) did not adjust its forecasts in this way, and that there were systematic forecast errors, but the evidence from the latter part of the period 2001–5 tentatively shows a behaviour pattern closer to that of the FOMC, with no clear signs of systematic errors.

Do We Really Know How Inflation Targeters Set Interest Rates?

In inflation targeting (IT) regimes, the Monetary Authority announces an explicit objective, the target for inflation. However, other objectives that possibly conflict with the inflation goal are present, such as keeping output close to its potential level and the stability of financial markets. This multiplicity of objectives has spurred a debate on whether inflation targeting really provides a transparent framework for monetary policy. This question is addressed in this paper, focusing on the experience of six countries that adopted IT. The empirical investigation is based on a variety of data sets (including real time data and Central Bank's forecasts), as well as on alternative forward-looking reaction functions. The main finding is that, if transparency is interpreted as the short run predictability of policy actions, consistent with the announced inflation goal, then most of the IT regimes here examined are remarkably transparent. However, this is not necessarily true if a more broad intepretation of transparency is required. The data also reveals a certain degree of heterogeneity across countries and time, and therefore recommends caution with respect to general statements regarding the properties of IT regimes.

Transparency and Reputation: The Publication of Central Bank Forecasts

Abstract Transparency has become one of the key features of monetary policy. This paper analyzes the reputational incentives related to transparency, focusing on the publication of central bank forecasts. A simple dynamic monetary policy game shows how transparency reduces inflation, as has been found empirically. Furthermore, the endogenous choice of transparency is analyzed. Although transparency exposes weak central banks, the negative market feedback in response to secrecy could provide a sufficiently strong inducement to become transparent. Thus, reputational concerns could lead to transparency, even without formal disclosure requirements.

Forecast‐Based Monetary Policy: The Case of Sweden

AbstractCentral banks are dominant players in financial markets and economic policy. For both democratic and efficiency reasons, it is important that central banks' actions can be understood, predicted, and evaluated. Inflation‐targeting central banks that publish their forecasts provide unique opportunities for detailed studies of monetary policy based on real‐time data. This paper demonstrates how a central bank's forecasts can be used to identify two different forms of discretionary monetary policy: ‘policy shocks’ (deviations from systematic policy) and ‘judgements’ in forecasting.

Publishing Central Bank Forecasts

In this paper, a simple model of information asymmetry is used to study central bank forecast publication. Central banks are assumed to choose between not publishing a forecast, publishing a forecast that conditions on current policy, publishing an unconditional forecast, or publishing both. There is no incentive for the central bank to publish forecasts unless it faces conflicting output and inflation objectives, and also possesses an information advantage over agents. A conservative central bank that does not have a large information advantage over agents may prefer not to publish forecasts at all, while a central bank that enjoys a large information advantage will prefer to publish unconditional forecasts.

Central bank forecasts of liquidity factors and the control of short term interest rates

A simple model of the interaction between central bank liquidity management and the inter-bank overnight rate is suggested, which allows analysing the publication of forecasts of liquidity factors by the European Central Bank adopted in June 2000. The paper argues that the main practical advantage of the publication of these forecasts is that it makes the signal extraction problem with regard to the centralbank's intentions trivial and hence allows establishing a superior behavioural equilibrium between the central bank and the money market participants. In this equilibrium, the central bank can achieve a better steering of overnight rates than under private autonomous factor forecasts, depending of course also on the quality of liquidity forecasts. It is furthermore shown that the publication of an average of autonomous factors, such as adopted by the ECB, is, at least within the model presented, superior to the separate publication of autonomous factors for each single day. JEL Codes: E52, E58, E43 Keywords: Interest Rates, Interest

Does It Pay to be Transparent? International Evidence Form Central Bank Forecasts

Is central bank transparency associated with variation in macroeconomic outcomes? Cross-country data covering 87 countries is used to construct an index for transparency based upon the detail in central banks' published forecasts. After controlling for a number of other institutional and macroeconomic variables it is found that an increase in the detail that central banks include in their published forecasts is associated with lower average inflation. The result holds regardless of whether the domestic nominal anchor is based more on an inflation or money target, but not for exchange rate targeting countries. Furthermore, no evidence is found that the publication of forecasts is associated with greater output volatility.(This abstract was borrowed from another version of this item.)

Does it Pay to be Transparent? International Evidence from Central Bank Forecasts

Is central bank transparency associated with variation in macroeconomic outcomes? Cross-country data covering 87 countries is used to construct an index for transparency based upon the detail in central banks' published forecasts. After controlling for a number of other institutional and macroeconomic variables it is found that an increase in the detail that central banks include in their published forecasts is associated with lower average inflation. The result holds regardless of whether the domestic nominal anchor is based more on an inflation or money target, but not for exchange rate targeting countries. Furthermore, no evidence is found that the publication of forecasts is associated with greater output volatility.

Why Adopt Transparency? The Publication of Central Bank Forecasts

Recently, several central banks have abandoned the usual secrecy in monetary policy and become very transparent. This paper provides an explanation for this puzzling fact, focusing on the disclosure of central bank forecasts. It shows that transparency reduces the inflationary bias and gives the central bank greater flexibility to respond to shocks in the economy. Furthermore, it makes it easier for a central bank to build reputation. To achieve these benefits of transparency it is generally necessary to publish the conditional central bank forecasts for both inflation and output.

Central Bank Forecasts of Liquidity Factors: Quality, Publication and the Control of the Overnight Rate

A simple model of the interaction between central bank liquidity management and the inter-bank overnight rate is suggested which helps understanding the effects of the publication of forecasts of liquidity factors by the European Central Bank adopted in June 2000. The paper argues that the main practical advantage of the publication of these forecasts is that it makes the signal extraction problem with regard to the central bank's operational intentions trivial and hence allows establishing a superior behavioural equilibrium between the central bank and the money market participants. In this equilibrium, the central bank can achieve a better steering of overnight rates than under private autonomous factor forecasts, depending of course also on the quality of liquidity forecasts. It is furthermore shown that the publication of an average of autonomous factors, such as adopted by the ECB, is, at least within the model presented, superior to the separate publication of autonomous factors for each single day.