Geneva Reports on the World Economy
Geneva Special 2: How do Central Banks Write? An Evaluation of Inflation Reports by Inflation Targeting Central Banks
An increasing number of central banks have adopted the inflation targeting strategy, and the trend does not seem to be ending. If inflation targeting offers a precise framework, its policy implications are surprisingly imprecise. For the strategy to be understood and generally supported, inflation targeting central banks need to communicate clearly and precisely. This is undoubtedly why they have also adopted the practice of producing a new publication often referred to as inflation reports. This study, the second 'Special Report' in the ICMB/CEPR series of Geneva Reports on the World Economy, offers the first in-depth analysis and evaluation of 20 inflation reports.
Most reports present inflation forecasts and an analysis of forces shaping inflation, the decision process and efficient executive summaries. Other desirable features are sometimes lacking or treated too lightly. This is the case, for example, of the methods and assumptions used to produce the inflation forecasts, the degree to which policy-setting committees agree among themselves and how they assess the risks ahead.
The study also presents an evaluation of the inflation reports based on a large number of criteria. In general, an inflation report that does well on one particular dimension does well in most others. While those central banks that adopted inflation targeting long ago tend to achieve high ratings, this is not systematically so. Recent adopters have jumped up the quality ladder.
The acid test of communication must be whether �good� inflation reports lead to a better understanding of monetary policy decisions. For this to be the case, it must be that central banks that achieve consistently high ratings are more predictable than those with less appreciated reports. A series of statistical tests suggests that this is indeed the case.
