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Do central banks respond timely to developments in the global economy?

Author

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  • Hilde C. Bjørnland
  • Leif Anders Thorsrud
  • Sepideh K. Zahiri

Abstract

Our analysis suggests; they do not! To arrive at this conclusion we construct a real-time data set of interest rate projections from central banks in three small open economies; New Zealand, Norway, and Sweden, and analyze if revisions to these projections (i.e., forward guidance) can be predicted by timely information. Doing so, we find a systematic role for forward looking international indicators in predicting the revisions to the interest rate projections in all countries. In contrast, using similar indexes for the domestic economy yields largely insignificant results. Furthermore, we find that revisions to forward guidance matter. Using a VAR identified with external instruments based on forecast errors from the predictive regressions, we show that the responses to output, inflation, the exchange rate and asset returns resemble those one typically associates with a conventional monetary policy shock.

Suggested Citation

  • Hilde C. Bjørnland & Leif Anders Thorsrud & Sepideh K. Zahiri, 2016. "Do central banks respond timely to developments in the global economy?," Working Papers No 8/2016, Centre for Applied Macro- and Petroleum economics (CAMP), BI Norwegian Business School.
  • Handle: RePEc:bny:wpaper:0048
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    2. Kamber, Güneş & Wong, Benjamin, 2020. "Global factors and trend inflation," Journal of International Economics, Elsevier, vol. 122(C).

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    More about this item

    Keywords

    Monetary policy; interest rate path; forecast revisions and global indicators;
    All these keywords.

    JEL classification:

    • C11 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Bayesian Analysis: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C55 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Large Data Sets: Modeling and Analysis
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F17 - International Economics - - Trade - - - Trade Forecasting and Simulation

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