Are Constant Interest Rate Forecasts Modest Policy Interventions? Evidence from a Dynamic Open-Economy Model
AbstractThis paper uses an estimated open-economy dynamic stochastic general equilibrium model for the euro area to examine if during 1993Q4-2002Q4 constant interest rate forecasts (CIRFs), commonly used by inflation-targeting central banks, are viewed as being in line with the central bank's historical policy behaviour. In the sense of Leeper and Zha (2003), a CIRF is defined as a modest intervention of the policy rule if it does not trigger the agents to revise their expectations about the inflation-targeting policy. Using univariate modesty statistics, we show that the modesty of the policy interventions depends on the assumptions about the uncertainty in the future shock realizations. Taking the joint effects of the policy interventions on all variables into consideration, we find that the CIRFs are not modest policy interventions in the latter part of the sample (1998Q4-2002Q4), and thereby affect the expectations formation of the agents. Consequently, the constant interest rate assumption has arguably led to conditional forecasts at the two-year horizon that cannot be considered economically meaningful during this period, and should not be used as a communication device by inflation-targeting central banks. Copyright Blackwell Publishing Ltd. 2005
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Wiley Blackwell in its journal International Finance.
Volume (Year): 8 (2005)
Issue (Month): 3 (December)
Contact details of provider:
Web page: http://www.blackwellpublishing.com/journal.asp?ref=1367-0271
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Christian Bustamante & Luis E. Rojas, 2012.
"Constant-Interest-Rate Projections and Its Indicator Properties,"
Borradores de Economia
696, Banco de la Republica de Colombia.
- Christian Bustamante & Luis E. Rojas, 2012. "Constant-Interest-Rate Projections and Its Indicator Properties," BORRADORES DE ECONOMIA 009383, BANCO DE LA REPÚBLICA.
- Knüppel, Malte & Schultefrankenfeld, Guido, 2013.
"The Empirical (Ir)Relevance of the Interest Rate Assumption for Central Bank Forecasts,"
Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order
80042, Verein für Socialpolitik / German Economic Association.
- Knüppel, Malte & Schultefrankenfeld, Guido, 2013. "The empirical (ir)relevance of the interest rate assumption for central bank forecasts," Discussion Papers 11/2013, Deutsche Bundesbank, Research Centre.
- Adolfson, Malin & Andersson, Michael K. & Lindé, Jesper & Villani, Mattias & Vredin, Anders, 2005.
"Modern Forecasting Models in Action: Improving Macroeconomic Analyses at Central Banks,"
Working Paper Series
188, Sveriges Riksbank (Central Bank of Sweden), revised 01 Jun 2006.
- Malin Adolfson & Michael K. Andersson & Jesper Lindé & Mattias Villani & Anders Vredin, 2007. "Modern Forecasting Models in Action: Improving Macroeconomic Analyses at Central Banks," International Journal of Central Banking, International Journal of Central Banking, vol. 3(4), pages 111-144, December.
- Pär Österholm, 2006.
"Incorporating judgement in fan charts,"
Finance and Economics Discussion Series
2006-39, Board of Governors of the Federal Reserve System (U.S.).
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.