Are Central Banks' Projections Meaningful?

32 Pages Posted: 22 Nov 2010  

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.

Keywords: conditinal forecats, constant interest rate projections, inflation targeting, interest rate path, interest rate rules, multiple equilibria

JEL Classification: E37, E58

Suggested Citation

Galí, Jordi, Are Central Banks' Projections Meaningful? (September 2010). CEPR Discussion Paper No. DP8027. Available at SSRN: https://ssrn.com/abstract=1711020

Jordi Gali (Contact Author)

Universitat Pompeu Fabra - Centre de Recerca en Economia Internacional (CREI) ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain
+34 93 542 2754 (Phone)
+34 93 542 1746 (Fax)

HOME PAGE: http://www.econ.upf.es/~gali

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

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Centre for Economic Policy Research (CEPR)

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National Bureau of Economic Research (NBER)

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