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Title: Central banks’ forecasts and their bias: Evidence, effects and explanation
Authors: Charemza, Wojciech
Ladley, Daniel
First Published: 18-Apr-2016
Publisher: Elsevier for International Institute of Forecasters
Citation: International Journal of Forecasting, 2016, 32,(3), pp. 804–817
Abstract: Through empirical analysis this paper shows that inflation forecasts produced for monetary policy councils in inflation targeting countries may be subject to bias towards the target. There is no clear evidence of such bias for other inflation forecasts. To explain this observation a model is constructed to analyse the effectiveness of monetary policy committee voting when the inflation forecast signals, upon which decisions are based, may be subject to manipulation. Using a discrete time intertemporal model, we examine the distortions resulting from such manipulation under a three-way voting system. We find that voting itself creates persistence and volatility in inflation. In the case when the expected value of the inflation distribution is not far from the target, alterations to the forecast signal, even if well intentioned, results in a diminished probability of achieving the inflation target and an increase in persistence. However, if committee members ‘learn’ in a Bayesian manner, this problem is mitigated.
DOI Link: 10.1016/j.ijforecast.2015.12.007
ISSN: 0169-2070
Version: Post-print
Status: Peer-reviewed
Type: Journal Article
Rights: Creative Commons “Attribution Non-Commercial No Derivatives” licence CC BY-NC-ND, further details of which can be found via the following link:
Description: JEL codes: E47, E52, E58
The file associated with this record is under embargo until 24 months after publication, in accordance with the publisher's self-archiving policy. The full text may be available through the publisher links provided above.
Appears in Collections:Published Articles, Dept. of Economics

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