IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Log in (now much improved!) to save this paper

Are model-based inflation forecasts used in monetary policymaking? A case study

  • Stefano Siviero

    ()

    (Bank of Italy, Economic Research Department)

  • Daniele Terlizzese

    ()

    (Bank of Italy, Economic Research Department)

  • Ignazio Visco

    ()

    (Bank of Italy, Economic Research Department)

The process through which economic policy is conceived and decided cannot be simply described as the optimisation of a well-defined loss function subject to the constraints provided by a model of the economy. Even ignoring the forbidding difficulties of eliciting a stable and explicit loss function from real-life policymakers, the availability of a model reliably describing all the responses of a complex economy to policy interventions is hardly to be expected. Policy will therefore be made against the background of an incomplete model, lacking some policy transmission channels, subject to data revision and possibly to instability in the estimated equations, requiring continuous reassessment in the light of the available data. Drawing on the experience gained with a macroeconometric model at the Bank of Italy, in this paper we describe the uses to which such a model can be put in the policymaking process. We find empirical support for the claim that the model is used in policymaking by assessing the extent to which the monetary policy followed by the Bank of Italy in a recent episode was influenced by inflation projections that diverged from the announced targets and by trying to identify other influences that played a role. The episode considered covers the 1995-97 disinflation, when upper limits to the current- and next-year inflation rates were explicitly announced by the Governor. The empirical analysis clearly indicates a role for model forecasts of inflation in monetary policymaking. This conclusion is robust, as inflation forecasts are shown to possess explanatory power with respect to policy choices, together with a number of other factors, including lagged values of the policy instrument, lagged inflation and other, independent, inflation forecasts.

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

File URL: http://www.bancaditalia.it/pubblicazioni/temi-discussione/1999/1999-0357/tema_357_99_it.pdf
Download Restriction: no

Paper provided by Bank of Italy, Economic Research and International Relations Area in its series Temi di discussione (Economic working papers) with number 357.

as
in new window

Length:
Date of creation: Sep 1999
Date of revision:
Handle: RePEc:bdi:wptemi:td_357_99
Contact details of provider: Postal:
Via Nazionale, 91 - 00184 Roma

Web page: http://www.bancaditalia.it

More information through EDIRC

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

as in new window
  1. Gressani, Daniela & Guiso, Luigi & Visco, Ignazio, 1988. "Disinflation in Italy: An analysis with the econometric model of the bank of Italy," Journal of Policy Modeling, Elsevier, vol. 10(2), pages 163-203.
  2. Gaiotti, E. & Nicoletti-Altimari, S., 1996. "Monetary Policy Transmission, the Exchange Rate and Long-Term Yields under Different Hypothesis on Expectations," Papers 276, Banca Italia - Servizio di Studi.
  3. Fornari, F. & Violi, R., 1998. "The Probability Density Function of Interest Rates Implied in the Price of Options," Papers 339, Banca Italia - Servizio di Studi.
  4. Lippi, F., 1999. "Median Voter Preferences, Central Bank Independence and Conservatis," Papers 351, Banca Italia - Servizio di Studi.
  5. Favero, C. & Hendry, D., 1990. "Testing The Lucas Critique: A Review," Economics Series Working Papers 99101, University of Oxford, Department of Economics.
  6. Alessandro Prati & Francesco Drudi, 1999. "Signaling Fiscal Regime Sustainability," IMF Working Papers 99/86, International Monetary Fund.
  7. Andrea Zaghini, 1999. "The economyc policy of fiscal consolidations: The european experience," Temi di discussione (Economic working papers) 355, Bank of Italy, Economic Research and International Relations Area.
  8. Roger E.A. Farmer, 1989. "The Lucas Critique Policy Invariance and Multiple Equilibria," UCLA Economics Working Papers 551, UCLA Department of Economics.
  9. Cukierman, A. & Lippi, F., 1998. "Central Bank Independence, Centralization of Wage Bargaining, Inflation and Unemployment: Theory and Evidence," Papers 332, Banca Italia - Servizio di Studi.
  10. Clarida, Richard & GalĂ­, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," CEPR Discussion Papers 1750, C.E.P.R. Discussion Papers.
  11. Gambacorta, L., 1998. "Heterogeneous "Credit Channels" and Optimal Monetary Policy in a Monetary Union," Papers 340, Banca Italia - Servizio di Studi.
  12. Altissimo, F. & Siviero, S. & Terlizzese, D., 1999. "How Deep Are the Deep Parameters?," Papers 354, Banca Italia - Servizio di Studi.
  13. Lars E.O. Svensson, 1998. "Inflation Targeting as a Monetary Policy Rule," NBER Working Papers 6790, National Bureau of Economic Research, Inc.
  14. Schivardi, Fabiano, 2003. "Reallocation and learning over the business cycle," European Economic Review, Elsevier, vol. 47(1), pages 95-111, February.
  15. repec:adr:anecst:y:2002:i:67-68:p:08 is not listed on IDEAS
  16. Smith, Ron, 1998. "Emergent policy-making with macroeconometric models," Economic Modelling, Elsevier, vol. 15(3), pages 429-442, July.
  17. Christina D. Romer & David H. Romer, 1996. "Federal Reserve Private Information and the Behavior of Interest Rates," NBER Working Papers 5692, National Bureau of Economic Research, Inc.
  18. Panetta, F. & Violi, R., 1999. "Is there an Equity Premium Puzzle in Italy? A Look at Asset Returns, Consumption and Financial Structure Data Over the Last Century," Papers 353, Banca Italia - Servizio di Studi.
  19. Gambacorta, L., 1999. "What Is the Optimal Institutional Arrangement for a Monetary Union?," Papers 356, Banca Italia - Servizio di Studi.
  20. Gaiotti, E. & Gavosto, A. & Grande, G., 1997. "Inflation and Monetary Policy in Italy: Some Recent Evidence," Papers 310, Banca Italia - Servizio di Studi.
  21. Francesco Nucci & Alberto Pozzolo, 1998. "Investment and the Exchange Rate," Temi di discussione (Economic working papers) 344, Bank of Italy, Economic Research and International Relations Area.
  22. Alberto Baffigi & Marcello Pagnini & Fabio Quintiliani, 1999. "Industrial District and Local Banks: Do the Twins Ever Meet?," Temi di discussione (Economic working papers) 347, Bank of Italy, Economic Research and International Relations Area.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:bdi:wptemi:td_357_99. 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: ()

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 references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link 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 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.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.