Shifts in the Inflation Target and Communication of Central Bank Forecasts

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Shifts in the Inflation Target and Communication of Central Bank Forecasts

Author Info

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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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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Find related papers by JEL classification:
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Determination of Interest Rates; Term Structure of Interest Rates
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

This paper has been announced in the following NEP Reports:

NEP-ALL-2007-04-14 (All new papers)
NEP-CBA-2007-04-14 (Central Banking)
NEP-FOR-2007-04-14 (Forecasting)
NEP-MAC-2007-04-14 (Macroeconomics)
NEP-MON-2007-04-14 (Monetary Economics)

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Frank Smets & Raf Wouters, 2004. "Comparing shocks and frictions in US and euro area business cycles: a Bayesian DSGE approach," Research series 200410-1, National Bank of Belgium. [Downloadable!]
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- Frank Smets & Raf Wouters, 2004. "Comparing shocks and frictions in US and euro area business cycles - a Bayesian DSGE approach," Working Paper Series 391, European Central Bank. [Downloadable!]
- 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. [Downloadable!] (restricted)
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- Faust, Jon & Svensson, Lars E O, 1998. "Transparency and Credibility: Monetary Policy with Unobservable Goals," CEPR Discussion Papers 1852, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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Eijffinger, Sylvester & Tesfaselassie, Mewael F., 2007. "Central Bank forecasts and disclosure policy: Why it pays to be optimistic," European Journal of Political Economy, Elsevier, vol. 23(1), pages 30-50, March. [Downloadable!] (restricted)
Other versions:
- Eijffinger, Sylvester C W & Tesfaselassie, Mewael F., 2005. "Central Bank Forecasts and Disclosure Policy: Why it Pays to be Optimistic," CEPR Discussion Papers 4854, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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Jensen, Henrik, 2002. " Optimal Degrees of Transparency in Monetary Policymaking," Scandinavian Journal of Economics, Blackwell Publishing, vol. 104(3), pages 399-422, September. [Downloadable!] (restricted)
Geraats, Petra M, 2000. "Why Adopt Transparency? The Publication of Central Bank Forecasts," CEPR Discussion Papers 2582, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
Other versions:
- Petra M. Geraats, 2001. "Why adopt transparency? The publication of central bank forecasts," Working Paper Series 41, European Central Bank. [Downloadable!]
- Petra M. Geraats, 2001. "Why Adopt Transparency? The Publication of Central Bank Forecasts," Macroeconomics 0012011, EconWPA. [Downloadable!]
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- Geraats, P.M., 2001. "Why Adopt Transparency? The Publication of Central Bank Forecasts," Papers 41, Quebec a Montreal - Recherche en gestion.

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