The Impact of Regime Change on the Influence of the Central Bank’s Inflation Forecasts: Evidence From Japan’s Shift to Inflation Targeting

International Journal of Central Banking, Forthcoming.

25 Pages Posted: 27 Jan 2021

See all articles by Masazumi Hattori

Masazumi Hattori

Hitotsubashi University

Steven Kong

affiliation not provided to SSRN

Frank Packer

Bank for International Settlements (BIS)

Toshitaka Sekine

Hitotsubashi University - Graduate School of Economics

Date Written: September 1, 2020

Abstract

Many central banks release inflation forecasts to reduce uncertainty; at the same time, an increasing number rely on a publicly stated medium-term inflation target to help anchor expectations. We examine how the adoption of an inflation target (IT) by a major central bank, the Bank of Japan (BOJ), influenced the impact of its inflation forecasts on private sector expectations. We find that the relative accuracy of central bank forecasts versus those of the private sector declined, a deterioration not evident in GDP forecasts. This appears to be have been due to a structural (upward) shift in central bank inflation forecasts with the introduction of the IT regime. Regression results suggest that private sector forecasts discounted the shift in central bank forecasts. The results are consistent with a regime, after the adoption of inflation targeting, in which private sector viewed the central bank forecasts as upwardly biased. More generally, they confirm the difficulty in raising inflation expectations from below in the presence of an effective lower bound in the nominal policy interest rate.

Keywords: central bank communication, inflation forecast, inflation targeting

JEL Classification: E31, E52, E58

Suggested Citation

Hattori, Masazumi and Kong, Steven and Packer, Frank and Sekine, Toshitaka, The Impact of Regime Change on the Influence of the Central Bank’s Inflation Forecasts: Evidence From Japan’s Shift to Inflation Targeting (September 1, 2020). International Journal of Central Banking, Forthcoming., Available at SSRN: https://ssrn.com/abstract=3735642

Masazumi Hattori

Hitotsubashi University ( email )

2-1 Naka Kunitachi-shi
Tokyo 186-8601
Japan

Steven Kong

affiliation not provided to SSRN

Frank Packer (Contact Author)

Bank for International Settlements (BIS) ( email )

CH-4002 Basel, Basel-Stadt
Switzerland
4161 280 8449 (Phone)

Toshitaka Sekine

Hitotsubashi University - Graduate School of Economics ( email )

Naka 2-1
Kunitachi, Tokyo 186-8601
Japan

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