DP8027 Are Central Banks' Projections Meaningful?
|Publication Date:||September 2010|
|Keyword(s):||conditinal forecats, constant interest rate projections, inflation targeting, interest rate path, interest rate rules, multiple equilibria|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=8027|
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.