Year: 2022
Type: article
Abstract: Expectations are among the main driving forces for economic dynamics. Therefore, managing expectations has become a primary objective for monetary policy seeking to stabilize the business cycle. In this paper, we study whether central banks can manage private-sector expectations by means of publishing one-period ahead inflation projections in a New Keynesian learning-to-forecast experiment. Subjects in the experiment observe these projections along with the historic development of the economy and subsequently submit their own one-period ahead inflation forecasts. In this context, we find that the central bank can significantly manage private-sector expectations and that this management strongly supports monetary policy in stabilizing the economy. Moreover, published central bank inflation projections drastically reduce the probability of a deflationary spiral after strong negative shocks to the economy.
Source: Macroeconomic Dynamics
Institutions: Freie Universität Berlin, Heidelberg University
Language: English
Domain: Social Sciences
Open Access status: hybrid
Estimated APC paid: $3,255
OpenAlex ID: W4205464098