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The Impact of Regime Change on the Influence of the Central Bank's Inflation Forecasts: Evidence from Japan's Shift to Inflation Targeting

Author

Listed:
  • Masazumi Hattori

    (Hitotsubashi University)

  • Steven Kong

    (Hong Kong Monetary Authority)

  • Frank Packer

    (Bank for International Settlements)

  • Toshitaka Sekine

    (Hitotsubashi University)

Abstract

Many central banks release inflation forecasts to reduce uncertainty; at the same time, an increasing number rely on a publicly stated medium-term inflation target to help anchor expectations.We examine how the adoption of an inflation target (IT) by a major central bank, the Bank of Japan (BOJ), influenced the impact of its inflation forecasts on private-sector expectations.We find that the relative accuracy of central bank forecasts versus those of the private sector declined, a deterioration not evident in GDP forecasts. This appears to have been due to a structural (upward) shift in central bank inflation forecasts with the introduction of the IT regime. Regression results suggest that private-sector forecasts discounted the shift in central bank forecasts. The results are consistent with a regime, after the adoption of inflation targeting, in which the private sector viewed the central bank forecasts as upwardly biased. More generally, they confirm the difficulty in raising inflation expectations from below in the presence of an effective lower bound in the nominal policy interest rate.

Suggested Citation

  • Masazumi Hattori & Steven Kong & Frank Packer & Toshitaka Sekine, 2021. "The Impact of Regime Change on the Influence of the Central Bank's Inflation Forecasts: Evidence from Japan's Shift to Inflation Targeting," International Journal of Central Banking, International Journal of Central Banking, vol. 17(70), pages 1-34, October.
    • Handle: RePEc:ijc:ijcjou:y:2021:q:4:a:7
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    References listed on IDEAS

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    6. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    7. repec:pri:cepsud:161blinder is not listed on IDEAS
    8. Orphanides, Athanasios, 2018. "The boundaries of central bank independence: Lessons from unconventional times," IMFS Working Paper Series 124, Goethe University Frankfurt, Institute for Monetary and Financial Stability (IMFS).
    9. Clemens Kool & Menno Middeldorp & Stephanie Rosenkranz, 2011. "Central Bank Transparency and the Crowding Out of Private Information in Financial Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 43(4), pages 765-774, June.
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    Cited by:

    1. Sohei Kaihatsu & Shogo Nakano & Hiroki Yamamoto, 2024. "Macroeconomic Impact of Shifts in Long-term Inflation Expectations," Bank of Japan Working Paper Series 24-E-18, Bank of Japan.
    2. Antón Sarabia Arturo & Bazdresch Santiago & Lelo-de-Larrea Alejandra, 2023. "The Influence of Central Bank's Projections and Economic Narrative on Professional Forecasters' Expectations: Evidence from Mexico," Working Papers 2023-21, Banco de México.
    3. repec:upd:utmpwp:042 is not listed on IDEAS
    4. Toshitaka Sekine & Frank Packer & Shunichi Yoneyama, 2022. "Individual Trend Inflation," IMES Discussion Paper Series 22-E-14, Institute for Monetary and Economic Studies, Bank of Japan.

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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • 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

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