IDEAS home Printed from https://ideas.repec.org/a/fip/fedker/y2001iqiiip5-42nv.86no.3.html
   My bibliography  Save this article

Why do central banks monitor so many inflation indicators?

Author

Listed:
  • Sharon Kozicki

Abstract

Monetary policy is typically undertaken with an eye to achieving a select few objectives in the long run. The Federal Reserve conducts monetary policy to promote two long-run goals: price stability and sustainable economic growth. In many other countries, central banks have a single long-run goal defined in terms of an inflation target. Yet while central banks have narrowly defined long-run goals, most monitor a wide range of economic indicators.> Why do central banks collect and analyze so many indicators? Kozicki presents multicountry empirical evidence to assess whether any single indicator reliably predicts inflation. If such an indicator exists, it would need to perform adequately under a wide variety of economic conditions and changing economic structures, because no country faces an unchanging economic environment. One way to test for such robust performance is to examine the value of indicators across a variety of countries experiencing different economic conditions, financial structures, policy shifts, and so forth.> Kozicki first discusses why several widely used indicators might predict inflation. She explains how the predictive performance of these indicators can be compared and reports empirical results for 11 developed economies, including the United States. She concludes that while monitoring the change in GDP growth is useful on average across countries, no single economic indicator is always reliable. This evidence supports an approach to policymaking that involves monitoring a wide range of economic indicators.

Suggested Citation

  • Sharon Kozicki, 2001. "Why do central banks monitor so many inflation indicators?," Economic Review, Federal Reserve Bank of Kansas City, issue Q III, pages 5-42.
  • Handle: RePEc:fip:fedker:y:2001:i:qiii:p:5-42:n:v.86no.3
    as

    Download full text from publisher

    File URL: http://www.kansascityfed.org/Publicat/econrev/Pdf/3q01kozi.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. Frederic S. Mishkin, 1989. "A Multi-Country Study of the Information in the Term Structure about Future Inflation," NBER Working Papers 3125, National Bureau of Economic Research, Inc.
    2. Jim Day & Ron Lange, 1997. "The Structure of Interest Rates in Canada: Information Content about Medium-Term Inflation," Staff Working Papers 97-10, Bank of Canada.
    3. Brunello, Giorgio, 1990. "Hysteresis and "The Japanese Unemployment Problem": A Preliminary Investigation," Oxford Economic Papers, Oxford University Press, vol. 42(3), pages 483-500, July.
    4. Robert J. Gordon, 1998. "Foundations of the Goldilocks Economy: Supply Shocks and the Time-Varying NAIRU," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(2), pages 297-346.
    5. Peter A. Abken, 1993. "Inflation and the yield curve," Economic Review, Federal Reserve Bank of Atlanta, issue May, pages 13-31.
    6. Davis, E Philip & Fagan, Gabriel, 1997. "Are Financial Spreads Useful Indicators of Future Inflation and Output Growth in EU Countries?," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(6), pages 701-714, Nov.-Dec..
    7. Stephen R. Blough, 1994. "Yield curve forecasts of inflation: a cautionary tale," New England Economic Review, Federal Reserve Bank of Boston, issue May, pages 3-16.
    8. Jeffrey A. Frankel & Cara S. Lown, 1994. "An Indicator of Future Inflation Extracted from the Steepness of the Interest Rate Yield Curve Along Its Entire Length," The Quarterly Journal of Economics, Oxford University Press, vol. 109(2), pages 517-530.
    9. Crowder, William J, 1998. "The Long-Run Link between Money Growth and Inflation," Economic Inquiry, Western Economic Association International, vol. 36(2), pages 229-243, April.
    10. Estrella, Arturo & Mishkin, Frederic S., 1997. "The predictive power of the term structure of interest rates in Europe and the United States: Implications for the European Central Bank," European Economic Review, Elsevier, vol. 41(7), pages 1375-1401, July.
    11. Blanchard, Olivier J. & Summers, Lawrence H., 1987. "Hysteresis in unemployment," European Economic Review, Elsevier, vol. 31(1-2), pages 288-295.
    12. Papell, David H, 1994. "Exchange Rates and Prices: An Empirical Analysis," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 35(2), pages 397-410, May.
    13. George A. Kahn, 1987. "Dollar depreciation and inflation," Economic Review, Federal Reserve Bank of Kansas City, issue Nov, pages 32-49.
    14. Jorion, Philippe & Mishkin, Frederic, 1991. "A multicountry comparison of term-structure forecasts at long horizons," Journal of Financial Economics, Elsevier, vol. 29(1), pages 59-80, March.
    15. Stephen G. Cecchetti & Rita S. Chu & Charles Steindel, 2000. "The unreliability of inflation indicators," Current Issues in Economics and Finance, Federal Reserve Bank of New York, vol. 6(Apr).
    16. Arthur M. Okun, 1975. "Inflation: Its Mechanics and Welfare Costs," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 6(2), pages 351-402.
    17. Stock, James H. & Watson, Mark W., 1999. "Forecasting inflation," Journal of Monetary Economics, Elsevier, vol. 44(2), pages 293-335, October.
    18. Joseph A. Whitt & Paul D. Koch & Jeffrey A. Rosensweig, 1986. "The dollar and prices: an empirical analysis," Economic Review, Federal Reserve Bank of Atlanta, issue Oct, pages 4-18.
    19. Olivier Blanchard & Lawrence F. Katz, 1997. "What We Know and Do Not Know about the Natural Rate of Unemployment," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 51-72, Winter.
    20. Robertson, Donald, 1992. "Term Structure Forecasts of Inflation," Economic Journal, Royal Economic Society, vol. 102(414), pages 1083-1093, September.
    21. Keith Sill, 1999. "Forecasts, indicators and monetary policy," Business Review, Federal Reserve Bank of Philadelphia, issue May, pages 3-14.
    22. Jeffrey C. Fuhrer, 1995. "The Phillips curve is alive and well," New England Economic Review, Federal Reserve Bank of Boston, issue Mar, pages 41-56.
    23. Douglas Staiger & James H. Stock & Mark W. Watson, 1997. "The NAIRU, Unemployment and Monetary Policy," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 33-49, Winter.
    24. Roberto Chang, 1997. "Is low unemployment inflationary?," Economic Review, Federal Reserve Bank of Atlanta, issue Q I, pages 4-13.
    25. Tzavalis, Elias & Wickens, M. R., 1996. "Forecasting inflation from the term structure," Journal of Empirical Finance, Elsevier, vol. 3(1), pages 103-122, May.
    26. Mishkin, Frederic S., 1991. "A multi-country study of the information in the shorter maturity term structure about future inflation," Journal of International Money and Finance, Elsevier, vol. 10(1), pages 2-22, March.
    27. Koedijk, Kees G & Kool, Clemens J M, 1995. "Future Inflation and the Information in International Term Structures," Empirical Economics, Springer, vol. 20(2), pages 217-242.
    28. Joseph Stiglitz, 1997. "Reflections on the Natural Rate Hypothesis," Journal of Economic Perspectives, American Economic Association, vol. 11(1), pages 3-10, Winter.
    29. Sharon Kozicki, 1997. "Predicting real growth and inflation with the yield spread," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 39-57.
    30. Joseph H. Haslag & D'Ann M. Ozment, 1991. "Money growth, supply shocks, and inflation," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue May, pages 1-17.
    31. R. W. Hafer, 1983. "Inflation: assessing its recent behavior and future prospects," Review, Federal Reserve Bank of St. Louis, issue Aug, pages 36-41.
    32. Engsted, Tom, 1995. "Does the Long-Term Interest Rate Predict Future Inflation? A Multi-country Analysis," The Review of Economics and Statistics, MIT Press, vol. 77(1), pages 42-54, February.
    33. George T. McCandless & Warren E. Weber, 1995. "Some monetary facts," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Sum, pages 2-11.
    34. Marco A. Espinosa-Vega & Steven Russell, 1997. "History and theory of the NAIRU: a critical review," Economic Review, Federal Reserve Bank of Atlanta, issue Q 2, pages 4-25.
    35. Geoffrey M.B. Tootell, 1994. "Restructuring, the NAIRU, and the Phillips curve," New England Economic Review, Federal Reserve Bank of Boston, issue Sep, pages 31-44.
    36. Stuart E. Weiner, 1993. "New estimates of the natural rate of unemployment," Economic Review, Federal Reserve Bank of Kansas City, issue Q IV, pages 53-69.
    37. Lakshman Alles & Ramaprasad Bhar, 1997. "The information on inflation in the Australian term structure," Applied Financial Economics, Taylor & Francis Journals, vol. 7(6), pages 721-730.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. David Longworth, 2003. "Money in the Bank (of Canada)," Technical Reports 93, Bank of Canada.
    2. Henry Ngongo, 2015. "Les indicateus avanc\'es de l'inflation en RDCongo," Papers 1509.06504, arXiv.org.
    3. Ben S. Bernanke & Jean Boivin & Piotr Eliasz, 2004. "Measuring the effects of monetary policy: a factor-augmented vector autoregressive (FAVAR) approach," Finance and Economics Discussion Series 2004-03, Board of Governors of the Federal Reserve System (U.S.).
    4. Sharon Kozicki & Peter A. Tinsley, 2002. "Alternative sources of the lag dynamics of inflation," Research Working Paper RWP 02-12, Federal Reserve Bank of Kansas City.
    5. Michael Berlemann & Forrest Nelson, 2005. "Forecasting Inflation via Experimental Stock Markets Some Results from Pilot Markets," ifo Working Paper Series 10, ifo Institute - Leibniz Institute for Economic Research at the University of Munich.
    6. Henry Ngongo, 2015. "Les indicateus avanc├ęs de l'inflation en RDCongo," Post-Print hal-01202369, HAL.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedker:y:2001:i:qiii:p:5-42:n:v.86no.3. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (LDayrit). General contact details of provider: http://edirc.repec.org/data/frbkcus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.