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.

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 Testing for Asymmetric Central Bank Preferences

2018 ◽  
Vol 10 (4) ◽  
pp. 25
Author(s):  
Felix S. Nyumuah
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Developed Countries ◽  
Central Banks ◽  
Policy Implications ◽  
Less Developed Countries ◽  
Reaction Function ◽  
Policy Rule ◽  
Asymmetric Preferences ◽  
Policy Reaction Function

The linear specification of the ideal monetary policy reaction function has been questioned in recent times by researchers. They have suggested a nonlinear framework where central banks exhibit asymmetric behaviours. Despite the important policy implications of having asymmetric central bank preferences, studies have been on single-country basis focusing almost entirely on advanced economies. The aim of this study is to check the existence of asymmetric preferences on the part of central banks in the context of a panel of countries and not just a single a country. The study derives and estimates a nonlinear flexible optimal monetary policy rule, which permits zone-like as well as asymmetric behaviours using panel data from a range of countries both developed and less developed. Although the findings indicate the presence of asymmetric preferences on the output gap across less developed countries, generally, the evidence is in favour of a linear policy reaction function and symmetric central bank preferences. These findings mean that monetary policy is characterised by a linear policy rule and symmetric central bank preferences. The results also indicate that interest rate ‘smoothing’ reaction by monetary authorities is more pronounced in less developed countries than in developed ones.

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.

scholarly journals Should Monetary Policy Respond To Asset Price Bubbles? Revisiting the Debate

2008 ◽  
Vol 206 ◽  
pp. 25-34 ◽  
Author(s):  
Sushil Wadhwani
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Asset Prices ◽  
Asset Price ◽  
Financial System ◽  
Central Banks ◽  
Macroeconomic Performance ◽  
Asset Price Bubbles ◽  
Price Bubbles ◽  
Inflation Forecasts

Recent events have highlighted the importance of asset prices to central bank decisions. We argue that, in response to asset price bubbles, central banks should ‘lean against the wind’ (LATW hereafter). Even if the bubbles themselves are not significantly affected by LATW, macroeconomic performance can be improved if monetary policy reacts to asset price misalignments over and above the reaction to fixed horizon inflation forecasts. In addition, it might reduce the probability of bubbles arising at all. This article restates the case for LATW, and reviews the debate. In particular I respond to various criticisms that have been made against LATW and briefly consider alternative policies designed to make the financial system less cyclical.

scholarly journals An Empirical Analysis of the Monetary Policy Reaction Function

2018 ◽  
Vol 10 (3) ◽  
pp. 30
Author(s):  
Felix S. Nyumuah
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Inflation Targeting ◽  
Policy Instruments ◽  
Ordinary Least Squares ◽  
Policy Rule ◽  
Reaction Functions ◽  
Expected Inflation ◽  
Monetary Policy Reaction Function ◽  
Consistent Response

Monetary policy decisions usually follow a policy rule which shows a consistent response of policy instruments to variations in inflation and economic growth. The aim of this study is to establish the nature of monetary policy in developing countries through the analysis of policy reaction functions. This study uses macroeconomic data from Ghana, a typical developing country. The study employs the Dynamic Ordinary Least Squares Estimation techniques and finds the central bank to follow a backward-looking Taylor rule. The evidence is that the central bank follows some form of policy rule and focuses more on past inflation relative to current or expected inflation. The results also indicate that the Bank of Ghana has been pursuing inflation targeting monetary policy. The central bank follows an inflation targeting rule allowing for output stabilisation. The exchange rate also plays a role in this stabilization effort.

scholarly journals Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence

2008 ◽  
Vol 46 (4) ◽  
pp. 910-945 ◽  
Author(s):  
Alan S Blinder ◽  
Michael Ehrmann ◽  
Marcel Fratzscher ◽  
Jakob De Haan ◽  
David-Jan Jansen
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Financial Markets ◽  
Real World ◽  
Communication Strategies ◽  
Central Banks ◽  
Communication Strategy ◽  
Scholarly Literature ◽  
Central Bank Communication ◽  
Almost All

Over the last two decades, communication has become an increasingly important aspect of monetary policy. These real-world developments have spawned a huge new scholarly literature on central bank communication—mostly empirical, and almost all of it written in this decade. We survey this ever-growing literature. The evidence suggests that communication can be an important and powerful part of the central bank's toolkit since it has the ability to move financial markets, to enhance the predictability of monetary policy decisions, and potentially to help achieve central banks' macroeconomic objectives. However, the large variation in communication strategies across central banks suggests that a consensus has yet to emerge on what constitutes an optimal communication strategy.

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 Alternative Core Inflation Measures in Nigeria: An Examination

2020 ◽  
Vol 7 (4) ◽  
pp. 112
Author(s):  
Ladi R. Bala-Keffi ◽  
Donald G. Mbaka ◽  
Nuruddeen Usman
Keyword(s):  
Monetary Policy ◽  
Central Bank ◽  
Inflation Targeting ◽  
Central Banks ◽  
Policy Framework ◽  
Communication Tool ◽  
Core Inflation ◽  
Aid Policy ◽  
Central Bankers ◽  
Monetary Policy Framework

Core inflation measures have played an important role in the conduct of monetary policy at various central banks around the world. We examine core inflation in Nigeria using non-traditional measures and assess their persistence, to determine whether the Central Bank of Nigeria (CBN) should pay attention to one or other of these measures when assessing inflation developments. We find that the two new measures outperform the official core rate in tracking the persistence of headline inflation. The findings of this study will aid policy making within the Central bank of Nigeria (CBN) particularly where inflation targeting is adopted as the monetary policy framework. These core inflation measures provide a useful guide to central bankers both for monetary policy decisions and as a communication tool. They are a better predictor of future inflation depicting the more persistent influences on underlying inflation, which are of interest to policymakers (e.g. Clark, 2001; Blinder and Reis, 2005; Smith, 2004 and Dolmas &Wynne, 2008).

The Stabilizing Effects of Publishing Strategic Central Bank Projections

2022 ◽  
pp. 1-43
Author(s):  
Steffen Ahrens ◽  
Joep Lustenhouwer ◽  
Michele Tettamanzi
Keyword(s):  
Monetary Policy ◽  
Private Sector ◽  
Central Bank ◽  
Driving Forces ◽  
Central Banks ◽  
Primary Objective ◽  
New Keynesian ◽  
Inflation Forecasts ◽  
Historic Development ◽  
The Business Cycle

Abstract Expectations are among the main driving forces for economic dynamics. Therefore, managing expectations has become a primary objective for monetary policy seeking to stabilize the business cycle. In this paper, we study whether central banks can manage private-sector expectations by means of publishing one-period ahead inflation projections in a New Keynesian learning-to-forecast experiment. Subjects in the experiment observe these projections along with the historic development of the economy and subsequently submit their own one-period ahead inflation forecasts. In this context, we find that the central bank can significantly manage private-sector expectations and that this management strongly supports monetary policy in stabilizing the economy. Moreover, published central bank inflation projections drastically reduce the probability of a deflationary spiral after strong negative shocks to the economy.

Sign in / Sign up

Export Citation Format

Share Document