Are Central Banks' Projections Meaningful?

30 Pages Posted: 27 Sep 2010 Last revised: 17 Oct 2010

See all articles by Jordi Galí

Jordi Galí

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI); Massachusetts Institute of Technology (MIT) - Department of Economics; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER)

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Date Written: September 2010

Abstract

Central banks' projections-i.e. forecasts conditional on a given interest rate path-are often criticized on the grounds that their underlying policy assumptions are inconsistent with the existence of a unique equilibrium in many forward-looking models. Here I describe three alternative approaches to constructing projections that are not subject to the above criticism, using two different versions of New Keynesian model as reference frameworks. Most importantly, I show how the three approaches generate different projections for inflation and output, even though they imply an identical path for the interest rate. The latter result calls into question the meaning and usefulness of such projections.

Suggested Citation

Gali, Jordi, Are Central Banks' Projections Meaningful? (September 2010). NBER Working Paper No. w16384, Available at SSRN: https://ssrn.com/abstract=1683134

Jordi Gali (Contact Author)

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Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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