Central Bank Communication and Disagreement about the Natural Rate Hypothesis

Abstract

About half of professional forecasters report that they use the natural rate of unemployment (u*) to forecast. I show that forecasters' reported use of and estimates of u* are informative about their expectations-formation process, including their use of a Phillips curve. Those who report not using u* have higher and less anchored inflation expectations, and seem to have found the Federal Reserve's state-based forward guidance less credible. The Federal Open Market Committee (FOMC) publishes participants' projections of longer-run unemployment in the Summary of Economic Projections. I document how and when the FOMC participants have disagreed with each other and with the private sector, discussing possible sources of disagreement and implications for credibility.

Keywords: Central Bank Communication, Federal Reserve, Summary of Economic Projections, Forward Guidance, Expectations, Natural Rate of Unemployment, Missing Disinflation, Survey Data, Disagreement

JEL Classification: E52, E58, E43, D83, D84