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Shifts in the Inflation Target and Communication of Central Bank Forecasts

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  • Mewael F. Tesfaselassie

Abstract

In a model with forward-looking expectations, the paper examines communication of central bank forecasts when the inflation target is subject to unobserved changes. It characterizes the effect of disclosure of forecasts on inflation and output stabilization and the choice of an active versus passive monetary policy. The paper shows that these choices depend on the slope of the Phillips curve, the central bank's preference weight on inflation relative to output and the ratio of the variability of the inflation target relative to the cost-push disturbance. The paper briefly discusses how disclosure of forecasts may be beneficial for a society that is more concerned about inflation stabilization than the central bank.

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Kiel Working Papers with number 1319.

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Length: 23 pages
Date of creation: Mar 2007
Date of revision:
Handle: RePEc:kie:kieliw:1319

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Related research

Keywords: Forward-looking expectations; inflation target; central bank fore- casts; disclosure policy;

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  1. Peter N. Ireland, 2005. "Changes in the Federal Reserve’s Inflation Target: Causes and Consequences," Boston College Working Papers in Economics 607, Boston College Department of Economics.
  2. Jensen, Henrik, 2002. " Optimal Degrees of Transparency in Monetary Policymaking," Scandinavian Journal of Economics, Wiley Blackwell, vol. 104(3), pages 399-422, September.
  3. Eijffinger, S.C.W. & Tesfaselassie, M.F., 2007. "Central bank forecasts and disclosure policy: Why it pays to be optimisitic," Open Access publications from Tilburg University urn:nbn:nl:ui:12-202789, Tilburg University.
  4. Christopher J. Erceg and Andrew T. Levin, 2001. "Imperfect Credibility and Inflation Persistence," Computing in Economics and Finance 2001 19, Society for Computational Economics.
  5. Svensson, Lars E.O. & Faust, John, 1998. "Transparency and Credibility: Monetary Policy with Unobservable Goals," Seminar Papers 636, Stockholm University, Institute for International Economic Studies.
  6. Geraats, Petra M., 2001. "Why adopt transparency? The publication of central bank forecasts," Working Paper Series 0041, European Central Bank.
  7. Smets, Frank & Wouters, Rafael, 2004. "Comparing Shocks and Frictions in US and Euro Area Business Cycles: A Bayesian DSGE Approach," CEPR Discussion Papers 4750, C.E.P.R. Discussion Papers.
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