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Inflation monitoring in real time: A comparative analysis of the Federal Reserve and the Bank of England

Idoia Aguirre and Jesús Vázquez

International Review of Economics & Finance, 2018, vol. 58, issue C, 200-209

Abstract: This paper extends the asymmetric preference model suggested by Ruge-Murcia (2003a) to investigate the use of real-time data which roughly measure the type of data available to policy makers when making their decisions and revised data which more accurately measure economic performance (Croushore, 2011). In our extended model, the central banker monitors a weighted average of revised and real-time inflation. Moreover, we allow for an asymmetric central bank focus on real-time inflation depending on whether the unemployment rate is high or low. Our model identifies a source of inflation bias due to inflation revisions. Our empirical results suggest that the Federal Reserve Bank focuses on monitoring revised inflation during low unemployment periods, but it weights real-time inflation heavily during high unemployment periods. In contrast, the Bank of England seems to focus on an equally-weighted average of real-time and revised inflation when monitoring inflation which is fairly robust over the business cycle.

Keywords: Real-time policy monitoring; Inflation revisions; Inflation bias; Asymmetric preferences (search for similar items in EconPapers)
JEL-codes: C52 E01 E31 E52 (search for similar items in EconPapers)
Date: 2018
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