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Why do central banks monitor so many inflation indicators?

  • Sharon Kozicki

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.

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Article provided by Federal Reserve Bank of Kansas City in its journal Economic Review.

Volume (Year): (2001)
Issue (Month): Q III ()
Pages: 5-42

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Handle: RePEc:fip:fedker:y:2001:i:qiii:p:5-42:n:v.86no.3
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