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Mr. Ken Miyajima and James Yetman
Inflation forecasts are modelled as monotonically diverging from an estimated long-run anchor point, or “implicit anchor”, towards actual inflation as the forecast horizon shortens. Fitting the model with forecasts by analysts, businesses and trade unions for South Africa, we find that inflation expectations have become increasingly strongly anchored. That is, the degree to which the estimated implicit anchor pins down inflation expectations at longer horizons has generally increased. Estimated inflation anchors of analysts lie within the 3–6 percent inflation target range of the central bank. However, the implicit anchors of businesses and trade unions, who are directly involved in the setting of wages and prices that drive the inflation process, have remained above the top end of the official target range. Possible explanations for these phenomena are discussed.
Chandranath Amarasekara, Rahul Anand, Kithsiri Ehelepola, Hemantha Ekanayake, Vishuddhi Jayawickrema, Sujeetha Jegajeevan, Csaba Kober, Tharindi Nugawela, Sergey Plotnikov, Adam Remo, Poongothai Venuganan, and Rasika Yatigammana
This study documents a semi-structural model developed for Sri Lanka. This model, extended with a fiscal sector block, is expected to serve as a core forecasting model in the process of the Central Bank of Sri Lanka’s move towards flexible inflation targeting. The model includes a forward-looking endogenous interest rate and foreign exchange rate policy rules allowing for flexible change in policy behavior. It is a gap model that allows for simultaneous identification of business cycle position and long-term equilibrium. The model was first calibrated and then its data-fit was improved using Bayesian estimation technique with relatively tight priors.
Mr. Ales Bulir, Jaromír Hurník, and Katerina Smidkova
We offer a novel methodology for assessing the quality of inflation reports. In contrast to the existing literature, which mostly evaluates the formal quality of these reports, we evaluate their economic content by comparing inflation factors reported by the central banks with ex-post model-identified factors. Regarding the former, we use verbal analysis and coding of inflation reports to describe inflation factors communicated by central banks in real time. Regarding the latter, we use reduced-form, new Keynesian models and revised data to approximate the true inflation factors. Positive correlations indicate that the reported inflation factors were similar to the true, model-identified ones and hence mark high-quality inflation reports. Although central bank reports on average identify inflation factors correctly, the degree of forward-looking reporting varies across factors, time, and countries.
Ms. Katerina Smídková, Viktor Kotlán, David Navrátil, and Mr. Ales Bulir
Inflation-targeting central banks have a respectable track record at explaining their policy actions and corresponding inflation outturns. Using a simple forward-looking policy rule and an assessment of inflation reports, we provide a new methodology for the empirical evaluation of consistency in central bank communication. We find that the three communication tools-inflation targets, inflation forecasts, and verbal assessments of inflation factors contained in quarterly inflation reports-provided a consistent message in five out of six observations in our 2000-05 sample of Chile, the Czech Republic, Hungary, Poland, Thailand, and Sweden.
Mr. Martin Cihak, Ms. Katerina Smídková, and Mr. Ales Bulir
The paper presents a methodology for measuring the clarity of central bank communication, illustrating it with the case of the European Central Bank (ECB) in 1999-2007. The analysis identifies the ECB's written communication as clear about 95 percent of instances, which is comparable to, or even better than, other central banks for which a similar analysis is available. We also find that the additional information contained in the ECB's Monthly Bulletins helps to improve communication clarity compared to ECB's press releases. In particular, the Bulletins contain useful clarifying information on individual inflation factors and the overall forecast risk; in contrast, the bulletin's communication on monetary shocks has a negative, albeit small, impact on clarity.
Mr. Ales Bulir and Ms. Katerina Smídková
The Czech National Bank has a respectable track record in terms of its policy actions and the corresponding inflation outturns. Using a simple forward-looking policy rule, we find that its main communication tools-inflation targets, inflation forecasts, verbal assessments of the inflation risks contained in quarterly inflation reports, and the voting within the CNB Board-provided a clear message in about three out of every four observations in our 2001- 2005 sample.
Pär Österholm and Mr. Helge Berger
We use a mean-adjusted Bayesian VAR model as an out-of-sample forecasting tool to test whether money growth Granger-causes inflation in the euro area. Based on data from 1970 to 2006 and forecasting horizons of up to 12 quarters, there is surprisingly strong evidence that including money improves forecasting accuracy. The results are very robust with regard to alternative treatments of priors and sample periods. That said, there is also reason not to overemphasize the role of money. The predictive power of money growth for inflation is substantially lower in more recent sample periods compared to the 1970s and 1980s. This cautions against using money-based inflation models anchored in very long samples for policy advice.
Mr. Vivek B. Arora
The transparency of monetary policy in South Africa has increased substantially since the end of the 1990s; but little empirical work has been done to examine the economic benefits of the increased transparency. This paper shows that, in recent years, South African private sector forecasters have become better able to forecast interest rates, are less surprised by reserve bank policy announcements, and are less diverse in the cross-sectional variety of their interest rate forecasts. In addition, there is some evidence that the accuracy of inflation forecasts has increased. The improvements in interest rate and inflation forecasts have exceeded those in real output forecasts, suggesting that increases in reserve bank transparency are likely to have played a role.
Mr. Christopher W. Crowe
I test whether inflation targeting (IT) enhances transparency using inflation forecast data for 11 IT adoption countries. IT adoption promotes convergence in forecast errors, suggesting that it enhances transparency. This effect is robust to dropping observations, is strengthened by using instrumental variable estimation to eliminate mean-reversion, and is absent in placebo regressions (where IT adoption is shifted by a year). This result supports Morris and Shin's (2002) contention that better public information is most beneficial for forecasters with bad private information. However, it does not support their hypothesis that better public information could make private forecasts less accurate.
Mr. Eric Parrado
The Monetary Authority of Singapore, instead of relying on short-term interest rates or monetary aggregates as its monetary policy instrument, conducts policy by managing the trade-weighted exchange rate index (TWI). This paper investigates how this operating procedure actually works. For empirical purposes, it assumes the authorities follow a reaction function that aims the TWI at stabilizing expected inflation and maintaining output at potential. A partial adjustment mechanism is included to dampen the actual changes in the exchange rate. The estimates confirm that the major focus of monetary policy in Singapore is controlling inflation. The estimated changes in the TWI track the actual change relatively well, and the estimated parameters are as expected. Accordingly, they support the hypothesis that monetary policy in Singapore can be described by a forward-looking policy rule that reacts to both inflation and output volatility. The results suggest that Singapore's monetary policy has mainly reacted to large deviations in the target variables, which is consistent with monetary policy's medium-term orientation.