A theory-based method to evaluate the impact of central bank inflation forecasts on private inflation expectations

Luciano Vereda, João Savignon and Tarciso Gouveia da Silva
Authors registered in the RePEc Author Service: Luciano Vereda Oliveira

International Journal of Forecasting, 2024, vol. 40, issue 3, 1069-1084

Abstract: We propose a theory-based method to assess the impact of central banks’ inflation forecasts on private inflation expectations. We use regressions derived from a leader-follower model with noisy information and public signals. The leader is the Central Bank (CB), which solves a signal extraction problem to estimate the rational expectation of inflation. Private agents then act by solving an analogous problem to estimate this same value by using their own information and the forecasts disclosed by the CB. The method allows for estimating the structural parameters that characterize noisy information models, which are hard to estimate using purely econometric tools. It also sheds light on the issue of the alleged CB’s superiority in predicting inflation behavior.

Keywords: Monetary policy; Communication; Inflation forecasts; Noisy information; Public signals (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfor:v:40:y:2024:i:3:p:1069-1084

DOI: 10.1016/j.ijforecast.2023.09.005

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