scholarly journals Coordinating expectations through central bank projections

2020 ◽  
Author(s):  
Fatemeh Mokhtarzadeh ◽  
Luba Petersen
Keyword(s):  
Central Bank ◽  
Rational Expectations ◽  
Inflation Targeting ◽  
Aggregate Stability ◽  
Central Banks ◽  
Output Gap ◽  
Forecast Errors ◽  
Market Participants ◽  
Wide Range ◽  
Ex Ante

AbstractCentral banks are increasingly communicating their economic outlook in an effort to manage the public and financial market participants’ expectations. We provide original causal evidence that the information communicated and the assumptions underlying a central bank’s projection can matter for expectation formation and aggregate stability. Using a between-subject design, we systematically vary the central bank’s projected forecasts in an experimental macroeconomy where subjects are incentivized to forecast the output gap and inflation. Without projections, subjects exhibit a wide range of heuristics, with the modal heuristic involving a significant backward-looking component. Ex-Ante Rational dual projections of the output gap and inflation significantly reduce the number of subjects’ using backward-looking heuristics and nudge expectations in the direction of the rational expectations equilibrium. Ex-Ante Rational interest rate projections are cognitively challenging to employ and have limited effects on the distribution of heuristics. Adaptive dual projections generate unintended inflation volatility by inducing boundedly-rational forecasters to employ the projection and model-consistent forecasters to utilize the projection as a proxy for aggregate expectations. All projections reduce output gap disagreement but increase inflation disagreement. Central bank credibility is significantly diminished when the central bank makes larger forecast errors when communicating a relatively more complex projection. Our findings suggest that inflation-targeting central banks should strategically ignore agents’ irrationalities when constructing their projections and communicate easy-to-process information.

The czech experience with inflation targeting in transition

2000 ◽  
Vol 9 (3) ◽  
Author(s):  
Kateřina Šmídková ◽  
Miroslav Hrnčíř
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Inflation Targeting ◽  
Central Banks ◽  
Communication Strategy ◽  
The Other ◽  
Short Term ◽  
Countries In Transition ◽  
The One

This paper argues that inflation targeting is a strategy that can be under certain conditions adopted by central banks in countries in transition even though their typical goal is to disinflate instead of stabilising low inflation. On the one hand, according to the Czech experience, inflation targeting offers several benefits, such as increasing control over expectations and short-term flexibility of monetary strategy, that are attractive for economy in transition. On the other hand, constraints imposed by period of transition as well as by openness of economy are present no matter which monetary strategy is chosen by the central bank. Implied costs should not be attributed to a particular monetary strategy. Inflation targeting has made various factors constraining monetary policy more visible and, as a result, requirements on the quality of decisions as well as on communication strategy have increased.

scholarly journals Communicating Monetary Policy Rules

2021 ◽  
pp. 1.000-31.000
Author(s):  
Troy A. Davig ◽  
◽  
Andrew Foerster ◽  
Keyword(s):  
Central Bank ◽  
Inflation Targeting ◽  
Time Frame ◽  
Central Banks ◽  
Communication Strategy ◽  
Policy Rule ◽  
Central Idea ◽  
Rule Based ◽  
Inflation Forecasts ◽  
Specific Rule

Despite the ubiquity of inflation targeting, central banks communicate their frameworks in a variety of ways. No central bank explicitly expresses their conduct via a policy rule, which contrasts with models of policy. Central banks often connect theory with their practice by publishing inflation forecasts that can, in principle, implicitly convey their reaction function. We return to this central idea to show how a central bank can achieve the gains of a rule-based policy without publicly stating a specific rule. The approach requires central banks to specify an inflation target, inflation tolerance bands, and provide economic projections. When inflation moves outside the band, inflation forecasts provide a time frame over which inflation will return to within the band. We show how this communication replicates and provides the same information as a rule-based policy. In addition, the communication strategy produces a natural benchmark for assessing central bank performance.

scholarly journals Ewolucja zmian i zadania banków centralnych w świetle doświadczeń kryzysu finansowego

2015 ◽  
Vol 1 (3) ◽  
pp. 35-50
Author(s):  
Agnieszka Alińska ◽  
Bogusław Pietrzak ◽  
Katarzyna Wasiak
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Inflation Targeting ◽  
Central Banks ◽  
Communication Policy ◽  
Market Participants ◽  
Forward Guidance ◽  
Monetary Authorities ◽  
Effective Instrument ◽  
Targeting Strategy

Communication policy of central banks in the framework of direct inflation targeting strategy and related strategies is important. Its tools include forward guidance as a method of influencing the expectations of market participants. Although forward guidance was used before the outbreak of the financial crisis, it was not popular. After 2008, under conditions of zero interest rate, monetary authorities have begun After 2008, under conditions of zero interest rate, monetary authorities have begun to use the forward guidance as an unconventional and effective instrument allowing monetary policy to have impact on market interest rates. However, the riskswhen using forward guidance include the possibility of misinterpretation of the conditional nature of the declaration of the monetary authorities.

Inflation expectations: An overview of modern approaches

2019 ◽  
pp. 54-80 ◽  
Author(s):  
N. A. Ranneva
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Financial Markets ◽  
Rational Expectations ◽  
Phillips Curve ◽  
Time Estimation ◽  
Central Banks ◽  
Inflation Expectations ◽  
Expectation Formation ◽  
Theoretical Approaches

Modern economic theory considers expectations as a key determinant of actual inflation. How agents form those expectations therefore plays a central role in macroeconomic dynamics and policy-making. The understanding of the expectation formation process and the real-time estimation of expectations are especially important for central banks because they need to be sure that longer-term inflation expectations are anchored at the target of inflation, set by the central bank. When expectations are anchored — it is a clear sign that the monetary policy is effective and that markets trust the central bank. However, it is not easy to assess the expected inflation: it is not observable and cannot be directly measured. Central banks can only use the indirect estimates of this variable. For many years the main theoretical framework for modeling and analysis of inflation expectations was Phillips curve with rational expectations which substituted the adaptive expectations. Today many alternative models of expectation formation are available. The article provides a brief overview of the evolution of theoretical approaches to inflation expectation formation and their impact on the monetary policy. Besides, using the experience of the U.S., the article addresses two main ways to gauge inflation expectations empirically — survey-based measures (for different groups of respondents) and measures based on the data from American financial markets. Shortcomings and merits of both approaches are discussed, as well as the importance of highly developed financial markets, which can become the source of more precise information on inflation expectations.

A Post-Keynesian Perspective on the Rise of Central Bank Independence

2013 ◽  
pp. 264-289
Author(s):  
Joerg Bibow
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Monetary Economics ◽  
Central Banks ◽  
Central Bank Independence ◽  
Time Inconsistency ◽  
Economic And Monetary Union ◽  
Wide Range ◽  
Historical Role ◽  
The One

Central bank independence (CBI) refers to the relation between the central bank and the state, the legislature and executive. In practice, central banks typically engage in a wide range of activities related to the currency sphere and the financial system. The mainstream literature popularizing CBI features a “narrow central bank” approach that concentrates on central banks’ monetary policy functions only, ignoring important interdependencies between monetary policy on the one hand, and central banks’ historical role as government’s banker (as one link to fiscal policy) and their role in safeguarding the financial system’s stability on the other. This chapter investigates the rise in CBI as an apparent success story in modern monetary economics. The worldwide rise in CBI is partly due to the advent of Economic and Monetary Union (EMU) in Europe. This chapter also discusses the time-inconsistency argument for CBI, post-Keynesian criticisms of CBI, and whether John Maynard Keynes’s model of CBI strikes a sound balance between democracy and efficiency.

scholarly journals Macroeconomic Switching Regimes and Monetary Policy in Canada

2017 ◽  
Vol 4 (4) ◽  
pp. 17 ◽  
Author(s):  
Ronald Henry Lange
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Inflation Targeting ◽  
Markov Switching ◽  
Output Gap ◽  
Impulse Response Functions ◽  
Switching Regimes ◽  
Long Run ◽  
Nominal Anchor ◽  
Policy Multipliers

This study examines the behaviour of monetary policy in Canada over the last 40 years using a Markov-switching VAR model of the macroeconomy. The Markov-switching estimates capture three continuous regimes that are interpreted as the ‘surprise’ regime from 1972Q1 to 1982Q2, the ‘recovery’ regime from 1982Q3 to 1991Q3 and the ‘target’ regime from 1991Q4 to 2014Q4. Monetary policy multipliers for the output gap are greater than one for all three regimes, suggesting that the central bank does not accommodate any expected changes in inflation over the long-run due to the domestic relationship between the output gap and future inflation. The long-run multipliers for inflation are equal to one in the surprise and recovery regimes, indicating that monetary policy also responds to offset inflation shocks. Overall, the policy multipliers and impulse response functions indicate a proactive central bank that responds systematically to movements in the output gap in order to control expected future inflation and to inflation surprises in the three regimes. The regime-dependent behaviour of monetary policy indicates a central bank pursuing an implicit form of inflation targeting as a means of achieving a nominal anchor for policy. The implicit inflation tar­gets are consistent with historical episodes of inflation in Canada over the past 40 years.

scholarly journals The external impacts of Central Bank independence

2010 ◽  
Vol 21 (54) ◽  
pp. 51-63 ◽  
Author(s):  
Carroll Howard Griffin
Keyword(s):  
Central Bank ◽  
Financial Crises ◽  
Inflation Targeting ◽  
Standard Procedure ◽  
Developed Countries ◽  
Central Banks ◽  
Central Bank Independence ◽  
The World ◽  
The Impact ◽  
Macroeconomic Environment

The term "central bank independence" (or abbreviated, CBI) can be broadly defined as the degree of freedom of the central bank to pursue monetary policy without interference from political considerations. The idea of central bank independence has been widely accepted over the last several decades by many countries around the world, both developed and developing. Since being first written about academically in the late 1980s, many countries have come to adopt this policy and many governments have come to recognize this as standard procedure. As such, many countries around the world granted autonomy to their central banks during the 1980s and 1990s. The majority of past studies have examined primarily the impact of central bank independence on inflation. however, the additional theoretical benefits are much more far reaching, the result of a more stable and prosperous macroeconomic environment. Additionally, there is only now sufficient data to empirically determine whether many of these claims are true. This study examines central bank independence in developing countries of Latin America and Asia as well as selected developed countries to determine what actual impact an autonomous central bank has had. It also examines such phenomena as financial crises (including the current global crisis of 2008-2009), inflation targeting, legal systems, country development and fiscal policy to determine the effects of these items on not only inflation, but the broad spectrum of macroeconomic outcomes. Although there is some empirical evidence to support the benefits of central bank independence, it is limited in scope to certain areas.

scholarly journals Does the Central Bank of Peru Respond to Exchange Rate Movements? A Bayesian Estimation of a New Keynesian DSGE Model with FX Interventions

2021 ◽  
Author(s):  
Gabriel Castillo ◽  
Paul Castillo ◽  
Harumi Hasegawa
Keyword(s):  
Exchange Rate ◽  
Central Bank ◽  
Interest Rates ◽  
Inflation Targeting ◽  
Taylor Rule ◽  
Nominal Exchange Rate ◽  
New Keynesian ◽  
Output Gap ◽  
Dsge Model ◽  
The Exchange Rate

This paper assess the role played by the exchange rate and FX intervention in setting monetary policy interest rates in Peru. We estimate a Taylor rule that includes inflation, output gap and the exchange rate using a New Keynesian DSGE model that follows closely Schmitt-Grohé and Uribe (2017). The model is extended to include an explicit sterilized FX intervention rule as in Faltermeier et al. (2017). The main empirical results show, for the pre Inflation Targeting (IT) and IT periods, that the model that clearly outperforms in terms of marginal log density, features a Taylor rule that does not respond to changes in the nominal exchange rate and an active use of FX intervention by the Central Bank. We also find that the coefficient associated with the response of the Taylor rule to inflation is close to 2 and the one associated with the output gap is greater than 1; and that FX intervention has become more responsive to exchange rate fluctuations during the IT period. Finally, the estimated IRFs shows that FX intervention has contributed to reduce the volatility of GDP in response to productivity and terms of trade shocks in Peru.

scholarly journals How to Improve Inflation Forecasting in Canada

2019 ◽  
Vol 2019 (190) ◽  
Author(s):  
Troy Matheson
Keyword(s):  
Real Time ◽  
Inflation Targeting ◽  
Commodity Prices ◽  
Output Gap ◽  
Forecast Errors ◽  
Bank Of Canada ◽  
Core Inflation ◽  
Inflation Forecasts ◽  
Inflation Forecasting ◽  
Gradual Approach

Against the backdrop of an ongoing review of the inflation-targeting framework, this paper examines the real-time inflation forecasts of the Bank of Canada with the aim of identifying potential areas for improvement. Not surprisingly, the results show that errors in forecasting non-core inflation (commodity prices etc.) are found to be the largest contributors to overall inflation forecast errors. Perhaps more importantly, relatively small core inflation forecast errors appear to mask large and offsetting errors related to the output gap and the policy interest rate, partly reflecting a tendency to overestimate the neutral nominal policy rate in real time. Faced with these uncertainties, the Governing Council’s gradual approach to changing its policy settings appears to have served it well.

scholarly journals SAY NO TO INFLATION TARGETING: A CALL FOR THE ADAPTATION OF A ZERO-INTEREST REGIME

2021 ◽  
Vol 7 (3) ◽  
Author(s):  
Atiq Ur Rehman
Keyword(s):  
Monetary Policy ◽  
Interest Rates ◽  
Inflation Targeting ◽  
Full Employment ◽  
Central Banks ◽  
Policy Framework ◽  
Price Stability ◽  
Socioeconomic Indicators ◽  
Wide Range ◽  
The Impact

In its early history, monetary policy focused on numerous objectives, including stable growth, full employment, stable exchange rates and price stability. In the 1990s, many countries shifted their monetary policy framework from monetary aggregate/interest rate targeting to inflation targeting, in which inflation was regarded as the primary target of monetary policy, and interest rates the primary tool for achieving target inflation. Inflation targeting has diverted the focus of central banks from growth and employment to price stability. Unfortunately, there is considerable evidence which shows that inflation targeting frameworks are unable to control inflation in the way central banks want, and in fact lead to a greater departure from optimal growth and employment, the two key targets of sustainable development goals (SDGs). There is also evidence suggesting a strong association between inflation targeting and the move away from several other SDGs. Employing a systematic review of the related literature and Granger causality tests applied to data from various countries, this paper shows that inflation targeting fails to control inflation and has several undesirable impacts on a wide range of socioeconomic indicators. It is argued that the zero-interest regime is the optimal regime with respect to the impact on socioeconomic indicators, and also supports the interest free economy advocated by Islam.

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