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Are central banks' projections meaningful?

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  • Galí, Jordi
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    Abstract

    Central banks' projections – i.e. forecasts conditional on a given interest rate path – are often criticized on the grounds that their assumptions are inconsistent with the existence of a unique equilibrium in many forward-looking models. The present paper describes three alternative approaches to constructing projections that are not subject to the above criticism, using the New Keynesian model as a reference framework. The three approaches are shown to generate different projections for inflation and output, even though they imply an identical path for the interest rate. The latter result calls into question the meaning and usefulness of such projections.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0304393211001127
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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Monetary Economics.

    Volume (Year): 58 (2011)
    Issue (Month): 6 ()
    Pages: 537-550

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    Handle: RePEc:eee:moneco:v:58:y:2011:i:6:p:537-550

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    Web page: http://www.elsevier.com/locate/inca/505566

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    References

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    1. Eric M. Leeper & Tao Zha, 1999. "Modest policy interventions," Working Paper 99-22, Federal Reserve Bank of Atlanta.
    2. Lawrence J. Christiano & Martin Eichenbaum & Charles Evans, 2001. "Nominal rigidities and the dynamic effects of a shock to monetary policy," Proceedings, Federal Reserve Bank of San Francisco, issue Jun.
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    5. Kaushik Mitra & Seppo Honkapohja, 2004. "Performance of Inflation Targeting Based on constant Interest Rate Projections," Computing in Economics and Finance 2004 130, Society for Computational Economics.
    6. Frank Smets & Raf Wouters, 2002. "An estimated dynamic stochastic general equilibrium model of the euro area," Working Paper Research 35, National Bank of Belgium.
    7. Michael Woodford, 2005. "Central bank communication and policy effectiveness," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 399-474.
    8. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
    9. Frank Smets & Raf Wouters, 2007. "Shocks and Frictions in US Business Cycles : a Bayesian DSGE Approach," Working Paper Research 109, National Bank of Belgium.
    10. Robert G. King & Alexander L. Wolman, 1996. "Inflation targeting in a St. Louis model of the 21st century," Review, Federal Reserve Bank of St. Louis, issue May, pages 83-107.
    11. Leitemo, Kai, 2003. " Targeting Inflation by Constant-Interest-Rate Forecasts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(4), pages 609-26, August.
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    Cited by:
    1. 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.
    2. Blake, Andrew, 2012. "Fixed interest rates over finite horizons," Bank of England working papers 454, Bank of England.

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