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Are central banks' projections meaningful?

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  • Galí, Jordi

Abstract

Central banks' projections – i.e. forecasts conditional on a given interest rate path – are often criticized on the grounds that their assumptions are inconsistent with the existence of a unique equilibrium in many forward-looking models. The present paper describes three alternative approaches to constructing projections that are not subject to the above criticism, using the New Keynesian model as a reference framework. The three approaches are shown to generate different projections for inflation and output, even though they imply an identical path for the interest rate. The latter result calls into question the meaning and usefulness of such projections.

Suggested Citation

  • Galí, Jordi, 2011. "Are central banks' projections meaningful?," Journal of Monetary Economics, Elsevier, vol. 58(6), pages 537-550.
  • Handle: RePEc:eee:moneco:v:58:y:2011:i:6:p:537-550 DOI: 10.1016/j.jmoneco.2011.11.004
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    References listed on IDEAS

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    1. repec:spr:empeco:v:53:y:2017:i:1:d:10.1007_s00181-016-1182-5 is not listed on IDEAS
    2. Knüppel, Malte & Schultefrankenfeld, Guido, 2013. "The Empirical (Ir)Relevance of the Interest Rate Assumption for Central Bank Forecasts," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80042, Verein für Socialpolitik / German Economic Association.
    3. Blake, Andrew, 2012. "Fixed interest rates over finite horizons," Bank of England working papers 454, Bank of England.
    4. Monica Jain & Christopher S. Sutherland, 2018. "How Do Central Bank Projections and Forward Guidance Influence Private-Sector Forecasts?," Staff Working Papers 18-2, Bank of Canada.

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