The Stabilizing Effects of Publishing Strategic Central Bank Projections

Expectations are among the main driving forces for economic dynamics. Therefore, managing expectations has become a primary objective for monetary policy seeking to stabilize the business cycle. In this paper, we study whether central banks can manage private-sector expectations by means of publishi...

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Bibliographic Details
Published inMacroeconomic dynamics Vol. 27; no. 3; pp. 826 - 868
Main Authors Ahrens, Steffen, Lustenhouwer, Joep, Tettamanzi, Michele
Format Journal Article
LanguageEnglish
Published Cambridge Cambridge University Press 01.04.2023
Subjects
Central banks
Communication
Credibility
Economic stabilization
Economic theory
Experiments
Inflation
Interest rates
Laboratories
Liquidity
Macroeconomics
Monetary policy
Publishing
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Summary:Expectations are among the main driving forces for economic dynamics. Therefore, managing expectations has become a primary objective for monetary policy seeking to stabilize the business cycle. In this paper, we study whether central banks can manage private-sector expectations by means of publishing one-period ahead inflation projections in a New Keynesian learning-to-forecast experiment. Subjects in the experiment observe these projections along with the historic development of the economy and subsequently submit their own one-period ahead inflation forecasts. In this context, we find that the central bank can significantly manage private-sector expectations and that this management strongly supports monetary policy in stabilizing the economy. Moreover, published central bank inflation projections drastically reduce the probability of a deflationary spiral after strong negative shocks to the economy.
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ISSN:1365-1005
1469-8056
DOI:10.1017/S1365100521000687