Central banks' macroeconomic projections and learning

Giuseppe Ferrero and Alessandro Secchi ()
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Alessandro Secchi: Bank of Italy, Economics and International Relations

No 782, Temi di discussione (Economic working papers) from Bank of Italy, Economic Research and International Relations Area

Abstract: We study the impact of the publication of central banks� macroeconomic projections on the dynamic properties of an economy where (i) private agents have incomplete information and form their expectations using recursive learning algorithms; (ii) the short-term nominal interest rate is set as a linear function of the deviations of inflation and real output from their target level; and (iii) the central bank, ignoring the exact mechanism used by private agents to form expectations, assumes that it can be reasonably approximated by perfect rationality and releases macroeconomic projections consistent with this assumption. The set of macroeconomic projections released by the central bank crucially affects the results in terms of stability of the equilibrium and speed of convergence of the learning process. In particular, while the publication of inflation and output gap projections enlarges the set of interest rate rules associated with stable equilibria and helps agents to learn faster, the announcement of the interest rate path exerts the opposite effect. In the latter case, in order to stabilize expectations and to speed up the learning process the response of the policy instrument to inflation should be stronger than when there is no announcement.

Keywords: monetary policy; transparency; interest rates; learning; speed of convergence (search for similar items in EconPapers)
JEL-codes: D83 E43 E52 E58 (search for similar items in EconPapers)
Date: 2010-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (8)

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Working Paper: Central bank’s macroeconomic projections and learning (2010)
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Persistent link: https://EconPapers.repec.org/RePEc:bdi:wptemi:td_782_10

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