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The predictability of monetary policy

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Author Info

  • Tobias Blattner
  • Marco Catenaro
  • Michael Ehrmann
  • Rolf Strauch
  • Jarkko Turunen

Abstract

Current best practice in central banking views a high level of monetary policy predictability as desirable. A clear distinction, however, has to be made between short-term and longer-term predictability. While short-term predictability can be narrowly defined as the ability of the public to anticipate monetary policy decisions correctly over short horizons, the broader, ultimately more meaningful concept of longerterm predictability also encompasses the ability of the private sector to understand the monetary policy framework of a central bank, i.e. its objectives and systematic behaviour in reacting to different circumstances and contingencies. In this broader sense, longer-term predictability is also closely related to the credibility of the central bank. This paper reviews the main conceptual issues relating to predictability, both in its short and longer-term dimensions, and discusses how a transparent monetary policy strategy can be – and indeed has been – instrumental in achieving this purpose. This latter aspect is investigated in an overview of the empirical literature, highlighting how financial markets have been increasingly able to correctly anticipate monetary policy decisions for a number of large central banks, including the ECB. The paper also reviews several possible empirical proxies for the less-explored concept of longer-term predictability, which is inherently more diffi cult to measure. JEL Classification: E52, E58, E61.

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Bibliographic Info

Paper provided by European Central Bank in its series Occasional Paper Series with number 83.

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Length: 41 pages
Date of creation: Mar 2008
Date of revision:
Handle: RePEc:ecb:ecbops:20080083

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Related research

Keywords: Predictability; central bank transparency; central bank communication.;

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Citations

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Cited by:
  1. Jakob de Haan & David-Jan Jansen, 2009. "The communication policy of the European Central Bank: An overview of the first decade," DNB Working Papers, Netherlands Central Bank, Research Department 212, Netherlands Central Bank, Research Department.
  2. Claus Brand & Daniel Buncic & Jarkko Turunen, 2010. "The Impact of ECB Monetary Policy Decisions and Communication on the Yield Curve," Journal of the European Economic Association, MIT Press, MIT Press, vol. 8(6), pages 1266-1298, December.
  3. Allard, Julien & Catenaro, Marco & Vidal, Jean-Pierre & Wolswijk, Guido, 2012. "Central bank communication on fiscal policy," Working Paper Series, European Central Bank 1477, European Central Bank.

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