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The predictability of monetary policy

Author

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  • Blattner, Tobias Sebastian
  • Catenaro, Marco
  • Ehrmann, Michael
  • Strauch, Rolf
  • Turunen, Jarkko

Abstract

Current best practice in central banking views a high level of monetary policy predictability as desirable. A clear distinction, however, has to be made between short-term and longer-term predictability. While short-term predictability can be narrowly defined as the ability of the public to anticipate monetary policy decisions correctly over short horizons, the broader, ultimately more meaningful concept of longer-term predictability also encompasses the ability of the private sector to understand the monetary policy framework of a central bank, i.e. its objectives and systematic behaviour in reacting to different circumstances and contingencies. In this broader sense, longer-term predictability is also closely related to the credibility of the central bank. This paper reviews the main conceptual issues relating to predictability, both in its short and longer-term dimensions, and discusses how a transparent monetary policy strategy can be - and indeed has been - instrumental in achieving this purpose. This latter aspect is investigated in an overview of the empirical literature, highlighting how financial markets have been increasingly able to correctly anticipate monetary policy decisions for a number of large central banks, including the ECB. The paper also reviews several possible empirical proxies for the less-explored concept of longer-term predictability, which is inherently more difficult to measure. JEL Classification: E52, E58, E61

Suggested Citation

  • Blattner, Tobias Sebastian & Catenaro, Marco & Ehrmann, Michael & Strauch, Rolf & Turunen, Jarkko, 2008. "The predictability of monetary policy," Occasional Paper Series 83, European Central Bank.
  • Handle: RePEc:ecb:ecbops:200883
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    References listed on IDEAS

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    Cited by:

    1. Jakob de Haan & David-Jan Jansen, 2009. "The communication policy of the European Central Bank: An overview of the first decade," DNB Working Papers 212, Netherlands Central Bank, Research Department.
    2. El-Shagi, Makram & Giesen, Sebastian & Jung, Alexander, 2016. "Revisiting the relative forecast performances of Fed staff and private forecasters: A dynamic approach," International Journal of Forecasting, Elsevier, vol. 32(2), pages 313-323.
    3. C.Jardet & A. Monks, 2014. "Euro Area monetary policy shocks: impact on financial asset prices during the crisis?," Working papers 512, Banque de France.
    4. Dorrucci, Ettore & Meyer-Cirkel, Alexis & Santabárbara, Daniel, 2009. "Domestic financial development in emerging economies: evidence and implications," Occasional Paper Series 102, European Central Bank.
    5. Georges Prat & Remzi Uctum, 2016. "Do markets learn to rationally expect US interest rates? Evidence from survey data," Post-Print hal-01411824, HAL.
    6. Eric M. Leeper & Todd B. Walker & Shu‐Chun Susan Yang, 2013. "Fiscal Foresight and Information Flows," Econometrica, Econometric Society, vol. 81(3), pages 1115-1145, May.
    7. Hartmann, Philipp & Smets, Frank, 2018. "The first twenty years of the European Central Bank: monetary policy," Working Paper Series 2219, European Central Bank.
    8. Claus Brand & Daniel Buncic & Jarkko Turunen, 2010. "The Impact of ECB Monetary Policy Decisions and Communication on the Yield Curve," Journal of the European Economic Association, MIT Press, vol. 8(6), pages 1266-1298, December.
    9. Paul Hubert, 2015. "ECB Projections as a Tool for Understanding Policy Decisions," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 34(7), pages 574-587, November.
    10. Allard, Julien & Catenaro, Marco & Vidal, Jean-Pierre & Wolswijk, Guido, 2013. "Central bank communication on fiscal policy," European Journal of Political Economy, Elsevier, vol. 30(C), pages 1-14.
    11. Ritter, Raymond, 2009. "Transnational governance in global finance: the principles for stable capital flows and fair debt restructuring in emerging markets," Occasional Paper Series 103, European Central Bank.
    12. El-Shagi, Makram & Giesen, Sebastian & Jung, Alexander, 2012. "Does Central Bank Staff Beat Private Forecasters?," IWH Discussion Papers 5/2012, Halle Institute for Economic Research (IWH).
    13. Vitale, Giovanni & Moutot, Philippe, 2009. "Monetary policy strategy in a global environment," Occasional Paper Series 106, European Central Bank.
    14. Gregora,Jiri & Melecky,Ales & Melecky,Martin, 2019. "Interest Rate Pass-Through : A Meta-Analysis of the Literature," Policy Research Working Paper Series 8713, The World Bank.
    15. Sturm, Michael & Gurtner, François & González Alegre, Juan, 2009. "Fiscal policy challenges in oil-exporting countries: a review of key issues," Occasional Paper Series 104, European Central Bank.
    16. Le Breton, Gwenaël & Be Duc, Louis, 2009. "Flow-of-funds analysis at the ECB: framework and applications," Occasional Paper Series 105, European Central Bank.
    17. repec:bkr:journl:v:77:y:2018:i:4:p:84-106 is not listed on IDEAS
    18. repec:kap:openec:v:28:y:2017:i:5:d:10.1007_s11079-017-9459-7 is not listed on IDEAS
    19. Kennickell, Arthur & Fitzpatrick, Trevor & Ehrmann, Michael & Bonci, Riccardo & Museux, Jean-Marc & Honkkila, Juha & Vilmunen, Jouko & Herrala, Risto & Komprej, Irena & Jeran, Matjaž & Geršak, Uroš & , 2009. "Survey data on household finance and consumption: research summary and policy use," Occasional Paper Series 100, European Central Bank.
    20. Köhler-Ulbrich, Petra & Asimakopoulos, Yannis & Doyle, Nicola & Magono, Ruth & Zachary, Marie-Denise & Walko, Zoltan & Stoess, Elmar & Kok, Christoffer & Wagner, Karin & Valckx, Nico & Martínez Pagés,, 2009. "Housing finance in the euro area," Occasional Paper Series 101, European Central Bank.

    More about this item

    Keywords

    central bank communication; central bank transparency; predictability;

    JEL classification:

    • 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
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination

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