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Rationalizing the Bias in Central Banks' Interest Rate Projections

Author

Listed:
  • Michael Frenkel
  • Jin-Kyu Jung
  • Jan-Christoph Rülke

Abstract

In this paper, we study the bias in interest rate projections for four central banks, namely for Czech Republic, New Zealand, Norway, and Sweden. We examine whether central bank projections are based on an asymmetric loss function and report evidence that central banks perceive an overprojection of their longer-term interest rate forecasts as twice as costly as an underprojection of the same size. We document that rationality is consistent with biased interest rate projections which contribute to explaining the central banks’ behavior.

Suggested Citation

  • Michael Frenkel & Jin-Kyu Jung & Jan-Christoph Rülke, 2017. "Rationalizing the Bias in Central Banks' Interest Rate Projections," WHU Working Paper Series - Economics Group 17-03, WHU - Otto Beisheim School of Management.
    • Handle: RePEc:whu:wpaper:17-03
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    File URL: https://nbn-resolving.org/urn:nbn:de:hbz:992-opus4-4041
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Interest rate forecasts; Central bank communication; Asymmetric loss;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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