Are Central Banks' Projections Meaningful?
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)
CEPR Discussion Paper No. DP8027
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.
Number of Pages in PDF File: 32
Keywords: conditinal forecats, constant interest rate projections, inflation targeting, interest rate path, interest rate rules, multiple equilibria
JEL Classification: E37, E58
Date posted: November 22, 2010