The Predictability of Monetary Policy

41 Pages Posted: 14 Mar 2008

See all articles by Tobias Sebastian Blattner

Tobias Sebastian Blattner

European Central Bank (ECB) - Directorate General Economics

Marco Catenaro

European Central Bank (ECB)

Michael Ehrmann

European Central Bank (ECB); Bank of Canada

Rolf Strauch

European Central Bank (ECB)

Jarkko Turunen

International Monetary Fund

Date Written: March 2008

Abstract

Current best practice in central banking views a high level of monetary policy predictability as desirable. A clear distinction, however, has to be made between short-term and longer-term predictability. While short-term predictability can be narrowly defined as the ability of the public to anticipate monetary policy decisions correctly over short horizons, the broader, ultimately more meaningful concept of longerterm predictability also encompasses the ability of the private sector to understand the monetary policy framework of a central bank, i.e. its objectives and systematic behaviour in reacting to different circumstances and contingencies. In this broader sense, longer-term predictability is also closely related to the credibility of the central bank. This paper reviews the main conceptual issues relating to predictability, both in its short and longer-term dimensions, and discusses how a transparent monetary policy strategy can be - and indeed has been - instrumental in achieving this purpose. This latter aspect is investigated in an overview of the empirical literature, highlighting how financial markets have been increasingly able to correctly anticipate monetary policy decisions for a number of large central banks, including the ECB. The paper also reviews several possible empirical proxies for the less-explored concept of longer-term predictability, which is inherently more difficult to measure.

Keywords: Predictability, central bank transparency, central bank communication

JEL Classification: E52, E58, E61

Suggested Citation

Blattner, Tobias Sebastian and Catenaro, Marco and Ehrmann, Michael and Strauch, Rolf and Turunen, Jarkko, The Predictability of Monetary Policy (March 2008). ECB Occasional Paper No. 83. Available at SSRN: https://ssrn.com/abstract=1084925

Tobias Sebastian Blattner (Contact Author)

European Central Bank (ECB) - Directorate General Economics ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Marco Catenaro

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Michael Ehrmann

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany
+49 69 1344/7327 (Phone)
+49 69 1344/6000 (Fax)

Bank of Canada ( email )

234 Wellington Street
Ontario, Ottawa K1A 0G9
Canada

Rolf Strauch

European Central Bank (ECB) ( email )

Sonnemannstrasse 22
Frankfurt am Main, 60314
Germany

Jarkko Turunen

International Monetary Fund ( email )

700 19th Street, N.W.
Washington, DC 20431
United States

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