Bank of England Gets Top Marks for Best Inflation Report

All inflation targeting central banks produce Inflation Reports. But what makes a good report? The
International Centre for Monetary and Banking Studies (ICMB) in Geneva in cooperation with the
Centre for Economic Policy Research (CEPR) has produced How Do Central Banks Write? by Andrea
Fracasso, Hans Genberg and Charles Wyplosz to assess Inflation Reports and find what information an
effective Report will include and how Inflation Reports should be structured to achieve clear communication
of monetary policy strategy.

How Do Central Banks Write? evaluates 19 inflation targeting central banks according to: how convincing
their Inflation Report is overall; the bank’s level of expertise; the completeness of the report; the clarity of
the writing style; the quality and fullness of the information provided; and whether or not the report is
intimidating to economists or non-economists. Using these criteria the authors found that the Bank of
England published the best overall Inflation Report of the 19 countries in the study.

The study ranks each country’s Inflation Report to give the following top ten:

1. United Kingdom
2. New Zealand
3. Brazil
4. Thailand
5. Chile
6. Czech Republic
7. Iceland
8. Norway
9. Sweden
10. South Korea

How Do Central Banks Write? concludes that the Inflation Report is an essential component of an
inflation targeting bank’s overall communication strategy and that a good Inflation Report covers three
areas:

• It must include an analysis of the current situation. This includes output and the labour market
  (wages and employment), monetary developments and financial developments and foreign
  conditions.

• Second, it must present a forecast of the inflation rate, along with the associated uncertainty. The
  inflation forecast is not enough, since policy actions will usually depend on other key variables such
  as GDP growth, unemployment, the exchange rate, the current account and, in some countries, the
  situation in major economic sectors. The Inflation Report must also present forecasts, or
  assumptions, concerning these key variables and an explanation of how different forecasts relate to
  each other.

• Third, the Inflation Report needs to explain how the Monetary Policy Committee (MPC) interprets
  current evidence and forecasts, including present and future uncertainties. The Inflation Report
  should also explain how the MPC views its past analyses, forecasts and decisions.

Fracasso, Genberg and Wyplosz show that a key advantage of inflation targeting is that it sets a tight
process and reasoning discipline inside the central bank. Inflation targeting also requires a very high degree
of transparency. Taken together, these two requirements of inflation targeting establish the need for a
detailed presentation of the data and procedures that go into the policy decision process. This can only be
done through the regular publication of an Inflation Report. This means the Inflation Report is a key feature
of good monetary policy-making.

How Do Central Banks Write? argues that inflation targeting considerably improves the quality of
monetary policy-making. Once an inflation targeting central bank has improved its internal performance, it
becomes fairly easy to share its handling of information and its MPC’s decisions. Good central banks do
almost everything right, including policy-making and the writing of the Inflation Report. In the end,
successful inflation targeting and publication of high-quality Inflation Reports are part and parcel of a
virtuous circle.

Authors: Andrea Fracasso (Graduate Institute of International Studies), Hans Genberg (Graduate
Institute of International Studies) and Charles Wyplosz (Graduate Institute of International Studies
and CEPR)

Contact Information:
For interview requests and further information about CEPR please contact CEPR Press Officer Robbie
Lonie, Tel: +44 (0) 20 7878 2919, Mobile: +44 (0) 7740519225 or email rlonie@cepr.org.

The Centre for Economic Policy Research (CEPR): CEPR was founded in 1983, with the belief that
policy decisions should be informed by sound economic analysis, based on fundamental theory. CEPR’s
network of nearly 600 affiliated researchers, comprising the top economists in Europe and beyond,
collaborate through the Centre to conduct research on issues affecting the European economy. CEPR
secures and administers funding grants for researcher projects, and disseminates their results. The
Centre’s wide-ranging research includes open economy macroeconomics, international trade, financial
economics, labour economics, industrial organization, public policy, and economic institutions.