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Central banks' macroeconomic projections and learning

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Author Info

  • Giuseppe Ferrero

    () (Bank of Italy, Economics and International Relations)

  • Alessandro Secchi

    () (Bank of Italy, Economics and International Relations)

Abstract

We study the impact of the publication of central banks’ macroeconomic projections on the dynamic properties of an economy where (i) private agents have incomplete information and form their expectations using recursive learning algorithms; (ii) the short-term nominal interest rate is set as a linear function of the deviations of inflation and real output from their target level; and (iii) the central bank, ignoring the exact mechanism used by private agents to form expectations, assumes that it can be reasonably approximated by perfect rationality and releases macroeconomic projections consistent with this assumption. The set of macroeconomic projections released by the central bank crucially affects the results in terms of stability of the equilibrium and speed of convergence of the learning process. In particular, while the publication of inflation and output gap projections enlarges the set of interest rate rules associated with stable equilibria and helps agents to learn faster, the announcement of the interest rate path exerts the opposite effect. In the latter case, in order to stabilize expectations and to speed up the learning process the response of the policy instrument to inflation should be stronger than when there is no announcement.

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Bibliographic Info

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 782.

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Date of creation: Dec 2010
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Handle: RePEc:bdi:wptemi:td_782_10

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Postal: Via Nazionale, 91 - 00184 Roma
Web page: http://www.bancaditalia.it
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Related research

Keywords: Monetary policy; Transparency; Interest rates; Learning; Speed of convergence;

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References

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  1. Kaushik Mitra & James Bullard, . "Learning About Monetary Policy Rules," Discussion Papers 00/41, Department of Economics, University of York.
  2. Stefano Eusepi & Bruce Preston, 2010. "Central Bank Communication and Expectations Stabilization," American Economic Journal: Macroeconomics, American Economic Association, vol. 2(3), pages 235-71, July.
  3. Glenn D. Rudebusch & John C. Williams, 2008. "Revealing the Secrets of the Temple: The Value of Publishing Central Bank Interest Rate Projections," NBER Chapters, in: Asset Prices and Monetary Policy, pages 247-289 National Bureau of Economic Research, Inc.
  4. George A. Kahn, 2007. "Communicating a policy path: the next frontier in central bank transparency?," Economic Review, Federal Reserve Bank of Kansas City, issue Q I, pages 25-51.
  5. Giuseppe Ferrero & Alessandro Secchi, 2009. "The Announcement of Monetary Policy Intentions," Temi di discussione (Economic working papers) 720, Bank of Italy, Economic Research and International Relations Area.
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Cited by:
  1. Martina Cecioni & Giuseppe Ferrero & Alessandro Secchi, 2011. "Unconventional Monetary Policy in Theory and in Practice," Questioni di Economia e Finanza (Occasional Papers) 102, Bank of Italy, Economic Research and International Relations Area.
  2. Evans, George W & Honkapohja, Seppo, 2011. "Learning as a rational foundation for macroeconomics and finance," Research Discussion Papers 8/2011, Bank of Finland.
  3. Alberto Locarno, 2012. "Monetary policy in a model with misspecified, heterogeneous and ever-changing expectations," Temi di discussione (Economic working papers) 888, Bank of Italy, Economic Research and International Relations Area.

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