Central Banking and Commercial Inflation Forecasting: Some New Evidence for the U.S.A

Dimitris Kenourgios and Nikolaos Pavlidis
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Nikolaos Pavlidis: Brunel University, Department of Economics and Finance, Postal: Uxbridge, Middlesex UB8 3PH, http://www.brunel.ac.uk/

Economia Internazionale / International Economics, 2004, vol. 57, issue 4, 475-493

Abstract: This paper focuses on the issue of the information asymmetry between

the Federal Reserve Bank and commercial forecasters. Previous theoretical and

empirical evidence suggests that in the absence of confidential supervisory

information, commercial forecasters either under- or over- predict future

inflation rates. We test whether such information can improve commercial

forecasts during the period 1990:2 to 2002:2, using the change in the Federal

Funds rate as a proxy for information available to the Fed at the time its forecasts

are made. Our findings indicate that there is benefit to be derived from the

inclusion of confidential supervisory information in forecasting future inflation.

When the Fed receives information that results in contractionary policy, the

results show commercial forecasts are generally below those of the Fed. This

evidence is consistent with the main findings of earlier U.S studies, supporting

the existence of an informational advantage by the Fed which improves its

ability to conduct monetary policy.

JEL Classification: E17Banking supervision; Federal Reserve Bank; Monetary policy; Inflation forecasts; Information asymmetry E52, E58

Keywords: Banking supervision; Federal Reserve Bank; Monetary policy; Inflation forecasts; Information asymmetry (search for similar items in EconPapers)
JEL-codes: E52 E58 (search for similar items in EconPapers)
Date: 2004
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