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Central Banking and Commercial Inflation Forecasting: Some New Evidence for the U.S.A

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Abstract

This paper focuses on the issue of the information asymmetry between the Federal Reserve Bank and commercial forecasters. Previous theoretical and empirical evidence suggests that in the absence of confidential supervisory information, commercial forecasters either under- or over- predict future inflation rates. We test whether such information can improve commercial forecasts during the period 1990:2 to 2002:2, using the change in the Federal Funds rate as a proxy for information available to the Fed at the time its forecasts are made. Our findings indicate that there is benefit to be derived from the inclusion of confidential supervisory information in forecasting future inflation. When the Fed receives information that results in contractionary policy, the results show commercial forecasts are generally below those of the Fed. This evidence is consistent with the main findings of earlier U.S studies, supporting the existence of an informational advantage by the Fed which improves its ability to conduct monetary policy. JEL Classification: E17Banking supervision; Federal Reserve Bank; Monetary policy; Inflation forecasts; Information asymmetry E52, E58

Suggested Citation

  • Kenourgios, Dimitris F. & Pavlidis, Nikolaos, 2004. "Central Banking and Commercial Inflation Forecasting: Some New Evidence for the U.S.A," Economia Internazionale / International Economics, Camera di Commercio Industria Artigianato Agricoltura di Genova, vol. 57(4), pages 475-493.
  • Handle: RePEc:ris:ecoint:0125
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    Keywords

    Banking supervision; Federal Reserve Bank; Monetary policy; Inflation forecasts; Information asymmetry;
    All these keywords.

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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