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Central banks' macroeconomic projections and learning

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  • 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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Web page: http://www.bancaditalia.it
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Keywords: Monetary policy; Transparency; Interest rates; Learning; Speed of convergence;

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  1. 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.
  2. James Bullard & Kaushik Mitra, 2002. "Learning about monetary policy rules," Working Papers 2000-001, Federal Reserve Bank of St. Louis.
  3. 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.
  4. Stefano Eusepi & Bruce Preston, 2007. "Central Bank Communication and Expectations Stabilization," NBER Working Papers 13259, National Bureau of Economic Research, Inc.
  5. Stephen Morris & Hyun Song Shin, 2002. "Social Value of Public Information," American Economic Review, American Economic Association, vol. 92(5), pages 1521-1534, December.
  6. 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.
  7. Glenn D. Rudebusch & John C. Williams, 2006. "Revealing the secrets of the temple: the value of publishing central bank interest rate projections," Working Paper Series 2006-31, Federal Reserve Bank of San Francisco.
  8. Marcet, Albert & Sargent, Thomas J., 1989. "Convergence of least squares learning mechanisms in self-referential linear stochastic models," Journal of Economic Theory, Elsevier, vol. 48(2), pages 337-368, August.
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Citations

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Cited by:
  1. Evans, George W. & Honkapohja, Seppo, 2011. "Learning as a Rational Foundation for Macroeconomics and Finance," CEPR Discussion Papers 8340, C.E.P.R. Discussion Papers.
  2. 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.
  3. 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.

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