Should Central Banks Reveal Expected Future Interest Rates?”Feb

We examine the conditions under which a central bank raises welfare by revealing its expected future interest rate in a simple two-period model with heterogeneous information between the central bank and the private sector. The central bank optimally sets the interest rate given its information. The model is designed to rule out common-knowledge and time inconsistency eects. Transparency - when the central bank publishes its interest rate forecast - fully aligns central bank and private sector expectations about the future in‡ation rate. The private sector fully trusts the central bank to eliminate future in‡ation and sets the long-term interest rate accordingly, leaving only the unavoidable central bank forecast error as a source of in‡ation volatility. Under opacity - when the central bank does not publish its interest rate forecast - current period in‡ation diers from its target not just because of the unavoidable central bank expectation error but also because central bank and p...

European Journal of Political Economy, 2007

In a simple macro model with forward-looking expectations, this paper looks into disclosure policy when a central bank has private information on future shocks. The main result is that advance disclosure of forecasts of future shocks does not improve welfare, and in some cases not desirable as it impairs stabilization of current inflation and/or output. This result holds when there is no credibility problem or the central bank's preference is common knowledge. When there is uncertainty about the central bank's preference shock, and this uncertainty is not resolved in the subsequent period, advance disclosure does not matter for current outcomes. The reason lies in the strong dependence of one-period-ahead private sector inflation forecasts on central bank actions, which induces the central bank to focus exclusively on price stability in subsequent periods. Another implication of the model is that, in contrast to forecasts of current period shocks emphasized by the literature, forecasts of future shocks may not be revealed to the public by current policy choices because the central bank refrains from responding to its own forecasts.

International Journal of Central Banking

We examine the effects of the release by a central bank of its expected future interest rate in a simple two-period model with heterogeneous information between the central bank and the private sector. The model is designed to rule out common-knowledge and time-inconsistency effects. Transparency—when the central bank publishes its interest rate path—fully aligns central bank and private-sector expectations about the future inflation rate. The private sector fully trusts the central bank to eliminate future inflation and sets the long-term interest rate accordingly, leaving only the unavoidable central bank forecast error as a source of inflation volatility. Under opacity—when the central bank does not publish its interest rate forecast—current-period inflation differs from its target not just because of the unavoidable central bank expectation error but also because central bank and privatesector expectations about future inflation and interest rates are no longer aligned. Opacity ...

Morris and Shin (2002) have shown that a central bank may be too transparent if the private sector pays too much attention to its possible imprecise signals simply because they are common knowledge. In their model, the central bank faces a binary choice: to reveal or not to ...

2007

This paper deals with theoretical and empirical dimension of publishing interest rates projections by central banks. Its first goal is to review arguments in favor of and against this decision and to illustrate the debate using experience of four central banks which publish or used to publish interest rates forecast. The second objective is to evaluate the Czech National Bank’s

The Scandinavian Journal of Economics, 2012

Non-technical summary 5

SSRN Electronic Journal, 2004

The 1990s and early 2000s witnessed an unprecedented increase in central bank transparency around the world, yet there has been little empirical work that convincingly demonstrates any economic benefits of increased central bank transparency. This paper shows that, since the late 1980s, U.S. financial markets and private sector forecasters have become: 1) better able to forecast the federal funds rate at horizons out to several months, 2) less surprised by Federal Reserve announcements, 3) more certain of their interest rate forecasts ex ante, as measured by interest rate options, and 4) less diverse in the cross-sectional variety of their interest rate forecasts. We also show that increases in Federal Reserve transparency are likely to have played a role: for example, private sector forecasts of GDP and inflation have not experienced similar improvements over the same period, indicating that the improvement in interest rate forecasts has been special.

RePEc: Research Papers in Economics, 2007

European Journal of Political Economy, 2007

We investigate how the link between inflation and inflation expectations alters with increasing transparency. Our motivation stems from the belief that changes in the institutional features or operations of the central bank affect, first and foremost, the way that private agents form their expectations about the future behavior of the central bank and only through them, inflation. To examine the link between inflation and inflation expectations, we apply the framework used by . The macroeconomic effects of inflation targeting. Federal Reserve Bank of St. Louis Review 86, 51-80.] and make use of the recent development of quantitative measures for transparency. We find evidence that transparency helps fixing private sector inflation expectations.

NBER International Seminar on Macroeconomics, 2007