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Forecasting the central bank's inflation objective is a good rule of thumb

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  • Diron, Marie
  • Mojon, Benoît

Abstract

This paper first shows that the forecast error incurred when assuming that future inflation will be equal to the inflation target announced by the central bank is typically at least as small and often smaller than forecast errors of model-based and published inflation forecasts. It then shows that there are substantial benefits in having rule-of-thumb agents who simply trust that the central bank will deliver its pre-announced inflation objective. JEL Classification: E5

Suggested Citation

  • Diron, Marie & Mojon, Benoît, 2005. "Forecasting the central bank's inflation objective is a good rule of thumb," Working Paper Series 564, European Central Bank.
    • Handle: RePEc:ecb:ecbwps:2005564
    Note: 1792986
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    File URL: https://www.ecb.europa.eu//pub/pdf/scpwps/ecbwp564.pdf
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    References listed on IDEAS

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    Cited by:

    1. Anastasios Evgenidis & Stephanos Papadamou, 2021. "The impact of unconventional monetary policy in the euro area. Structural and scenario analysis from a Bayesian VAR," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(4), pages 5684-5703, October.
    2. Alex Brazier & Richard Harrison & Mervyn King & Tony Yates, 2008. "The Danger of Inflating Expectations of Macroeconomic Stability: Heuristic Switching in an Overlapping-Generations Monetary Model," International Journal of Central Banking, International Journal of Central Banking, vol. 4(2), pages 219-254, June.
    3. Bilke, Laurent & Stracca, Livio, 2007. "A persistence-weighted measure of core inflation in the Euro area," Economic Modelling, Elsevier, vol. 24(6), pages 1032-1047, November.
    4. Bańbura, Marta & Giannone, Domenico & Lenza, Michele, 2015. "Conditional forecasts and scenario analysis with vector autoregressions for large cross-sections," International Journal of Forecasting, Elsevier, vol. 31(3), pages 739-756.
    5. Gilberto Tadeu Lima & Mark Setterfield & Jaylson Jair da Silveira, 2014. "Inflation Targeting and Macroeconomic Stability with Heterogeneous Inflation Expectations," Journal of Post Keynesian Economics, Taylor & Francis Journals, vol. 37(2), pages 255-279, December.
    6. Angela Capolongo & Claudia Pacella, 2021. "Forecasting inflation in the euro area: countries matter!," Empirical Economics, Springer, vol. 61(5), pages 2477-2499, November.
    7. Johannes Zahner, 2020. "Above, but close to two percent. Evidence on the ECB’s inflation target using text mining," MAGKS Papers on Economics 202046, Philipps-Universität Marburg, Faculty of Business Administration and Economics, Department of Economics (Volkswirtschaftliche Abteilung).
    8. Silveira, Jaylson Jair da & Lima, Gilberto Tadeu, 2015. "Conquering Credibility for Monetary Policy under Sticky Confidence," Revista Brasileira de Economia - RBE, EPGE Brazilian School of Economics and Finance - FGV EPGE (Brazil), vol. 69(2), June.

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    More about this item

    Keywords

    credibility; inflation forecast; inflation targeting; monetary policy;
    All these keywords.

    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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