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Central Bank forecasts and disclosure policy: Why it pays to be optimistic

  • Eijffinger, Sylvester
  • Tesfaselassie, Mewael F.

In a simple macromodel with forward-looking expectations, this Paper looks into disclosure policy when a central bank has private information on future shocks. The main result is that advance disclosure of forecasts of future shocks does not improve welfare, and in some cases is not desirable as it impairs stabilization of current inflation and/or output. This result holds when there is no credibility problem or the central bank’s preference is common knowledge. When there is uncertainty about the central bank’s preference shock, and this uncertainty is not resolved in the subsequent period, advance disclosure does not matter for current outcomes. The reason lies in the strong dependence of one-period-ahead private sector inflation forecasts on central bank actions, which induces the central bank to focus exclusively on price stability in subsequent periods. Another implication of the model is that, in contrast to forecasts of current period shocks emphasized by the literature, forecasts of future shocks may not be revealed to the public by current policy choices because the central bank refrains from responding to its own forecasts.

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Article provided by Elsevier in its journal European Journal of Political Economy.

Volume (Year): 23 (2007)
Issue (Month): 1 (March)
Pages: 30-50

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Handle: RePEc:eee:poleco:v:23:y:2007:i:1:p:30-50
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505544

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