Politická ekonomie
Politická ekonomie
Prague Economic Papers
University of Economics, Prague

Prague Economic Papers Vol. 28 No. 3

Macroeconomic Forecast Relevance in the Central Bank’s Decisions. The Case of European Economies

DOI: https://doi.org/10.18267/j.pep.711

[full text (PDF)]

Magdalena Szyszko, Aleksandra Rutkowska

We examine central banks’ involvement in inflation forecast targeting by means of an index-based analysis and ordered logistic regression. The research encompasses the Bank of England, the Czech National Bank, the National Bank of Poland and the Sveriges Riksbank. They produce conditional or unconditional macroeconomic forecasts. Hence, two paths have been used to examine them. We examine whether the four central banks follow their forecasts to some extent. We have found that the CNB and SR are highly consistent in terms of compatibility of their decisions with the forecasts, timing of decisions, and communication by means of forecasts. The NBP follows its forecast much less consistently, while the BoE ignores it altogether. As some of the results for the BoE and NBP are unambiguous, we remain cautious while interpreting them. This paper contributes to the literature on the empirical evaluation of inflation forecast targeting.

Keywords: central bank decision rules, inflation forecast targeting, macroeconomic forecasts

JEL Classification: C25, E52, E58

References:

Arlt, J., Mandel, M. (2014). The Reaction Function of Three Central Banks of Visegrad group.

Prague Economic Papers, 23(3), 269–289, https://doi.org/10.18267/j.pep.484

Batini, N., Nelson E. (2001). The Lag from Monetary Policy Actions to Inflation: Friedman

Revisited. International Finance, 4(3), 381–400, https://doi.org/10.1111/1468-2362.00079

Bank of England (2016). Inflation Report. November. London: Bank of England.

Brzoza-Brzezina, M., Kotłowski, J., Miśkowiec, A. (2013). How Forward-looking are Central

Banks? Some Evidence from Their Forecasts. Applied Economics Letters, 20(2), 142–146,

https://doi.org/10.1080/13504851.2012.684780

Clinton, K. et al. (2017). Czech Magic: Implementing Inflation-forecast Targeting at CNB. IMF.

Working Paper No. 17/21, https://doi.org/10.5089/9781475572971.001

Czech National Bank (2016). Inflation Targeting in the Czech Republic. Prague: Czech National

Bank. [Retrieved 2017-05-12] Available at: https://www.cnb.cz/en/monetary_policy/inflation_targeting.html

Eijffinger, S. C., Geraats, P. M. (2006). How Transparent are Central Banks? European Journal

of Political Economy, 22(1), 1–21, http://doi.org/10.1016/j.ejpoleco.2005.09.013

Galí, J. (2003). New Perspectives on Monetary Policy, Inflation, and the Business Cycle,

in Dewatripont, M., Hansen, L., Turnovsky, S., eds., Advances in Economics and

Econometrics: Theory and Applications. Cambridge: Cambridge University Press,

pp. 151–197, https://doi.org/10.1017/CBO9780511610264.007

Giannoni, M. P., Woodford, M. (2003). How Forward-looking Optimal Monetary Policy? Journal

of Money, Credit, and Banking, 35(6), 1425–1469, https://doi.org/10.1353/mcb.2004.0029

Goodhard, Ch. A. E., Bin Lim, W. (2011). Interest Rate Forecast: a Pathology. International Journal

of Central Banking, 7(2), 135–170.

Hallsten, K., Tägtström, S. (2009). The Decision-making Process – How the Executive Board

of the Riksbank Decides on the Repo Rate. SR Economic Review, 1, 69–89.

Havranek, T., Rusnak, M. (2013). Monetary Transmission Lag: A Meta-analysis. International

Journal of Central Banking, 12, 39–76.

Kahn, G. A. (2007). Communicating a Policy Path: the Next Frontier in Central Bank

Transparency? Federal Reserve Bank of Kansas City, Economic Review, Q1, 15–16.

Kotłowski, J. (2006). Reaction Functions of the Polish Central Bankers – a Logit Approach. Bank

and Credit, 4, 4–18.

Machaj, M. (2016). Can the Taylor Rule be a Good Guidance for Policy? The Case of 2011-2088

Real Estate Bubble. Prague Economic Papers, 4(25), 381–395, https://doi.org/10.18267/j.pep.573

Mackiewicz-Łyziak, J. (2017). Are Central Banks in CEE Concerned about the Burden of

Public Debt? Comparative Economic Research, 20(1), 35–51, https://doi.org/10.1515/cer-2017-0003

National Bank of Poland (2015). Inflation Report. Warsaw: National Bank of Poland.

Rudebusch, G., Svensson, L. E. O. (1998). Policy Rules for Inflation Targeting. Stockholm

University, Institute for International Economic Studies. Seminar Papers No. 637 [Retrieved

2017-05-12] Available at: http://su.diva-portal.org/smash/get/diva2:327707/FULLTEXT01

Svensson, L. E. O. (1997). Inflation Forecast Targeting: Implementing and Monitoring

Inflation Targets. European Economic Review, 41(6), 1111–1146, https://doi.org/10.1016/S0014-2921(96)00055-4

_________ (2000a). Forward-looking Monetary Policy, Leading Indicators, and the Riksbank’s

Inflation Report vs. the ECB’s Monthly Bulletin. [Retrieved 2017-05-12] Available at:

https://larseosvensson.se/files/papers/ep0090.pdf

_________ (2000b). Open-economy Inflation Targeting. Journal of International Economics,

50(1), 155–183, https://doi.org/10.1016/S0022-1996(98)00078-6

_________ (2002). Inflation Targeting: Should it be Modeled as an Instrument Rule

or a Targeting Rule? European Economic Review, 46(4–5), 771–780, http://doi.org/10.1016/S0014-2921(01)00212-4

_________ (2003a). The Inflation Forecast and Loss Function, in Mizen, P., ed., Central Banking,

Monetary Theory and Practice: Essays in Honour of Charles Goodhart. Vol. I, Cheltenham:

Edward Elgar Publishing, pp. 135–152.

_________ (2003b). What is Wrong with Taylor Rules? Using Judgements in Monetary Policy

through Targeting Rules. Journal of Economic Literature, 41(2), 426–477, https://doi.org/10.1257/.41.2.426

_________ (2005). Monetary Policy with Judgments: Forecast Targeting. International Journal

of Central Banking, 1, 1–54.

_________ (2007). Optimal Inflation Targeting: Further Development of Inflation Targeting,

in Mishkin, F. S., Schmidt-Hebbel, K., eds., Monetary Policy under Inflation Targeting.

Santiago: Banco Central de Chile, pp. 187–225.

Szyszko, M. (2017). How the Central Bank Makes Decision on Interest Rates? Comparative

Analysis of Forecast Importance. Equilibrium. Quarterly Journal of Economics and Economic

Policy, 12(2), 281–294, http://doi.org/10.24136/eq.v12i1.15

Taylor, J. B. (1993). Discretion versus Policy Rules in Practice. Carnegie – Rochester Conference

Series on Public Policy, 39, 195–214, https://doi.org/10.1016/0167-2231(93)90009-l

Woodford, M. (2003). Interest and Prices. Foundations of Theory of Monetary Policy. Princeton:

Princeton University Press. ISBN 9780691010496.

_________ (2012). Forecast Targeting as a Monetary Policy Strategy: Policy Rules in Practice,

in Koeing, E. F. et al., eds., The Taylor Rule and the Transformation of Monetary Policy.

Stanford: Hoover Institution Press Publication, pp. 185–284.