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Central bank’s macroeconomic projections and learning

Giuseppe Ferrero () and Alessandro Secchi ()

No 72, NBP Working Papers from Narodowy Bank Polski, Economic Research Department

Abstract: We study the impact of the publication of central bank’s 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. Results in terms of stability of the equilibrium and speed of convergence of the learning process crucially depend on the set of macroeconomic projections released by the central bank. In particular, while the publication of inflation and output gap projections enlarges the set of interest rate rules associated with stable equilibria under learning 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 under no announcement.

Keywords: Monetary policy; Communication; Interest rates; Learning; Speed of Convergence (search for similar items in EconPapers)
JEL-codes: E58 E52 E43 D83 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
Date: 2010
Note: The paper was presented at the National Bank of Poland’s conference „Publishing Central Bank forecast in theory and practice” held on 5–6 November 2009 in Warsaw.
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