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Optimal forward guidance in monetary policy: Can central banks sway the public with projections?

Published online by Cambridge University Press:  12 October 2023

Christian Jensen Open the ORCID record for Christian Jensen [Opens in a new window]
Christian Jensen*
Affiliation:
Department of Economics, Moore School of Business, University of South Carolina, Columbia, SC, USA
*
Email: cjensen@alumni.cmu.edu
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Abstract

Because economic outcomes depend on private-sector expectations, central banks might be tempted to guide these by publishing projections of key macroeconomic variables. We find that optimal projections require misleading the public. Optimal non-misleading projections are time-inconsistent. Non-misleading time-consistent projections can only improve policy outcomes if the public’s forecasts are noisier, or inconsistent with implemented policy. Since the public only has incentives to be guided by policymakers’ projections when most vulnerable to being mislead, these cannot be trusted blindly. Consistent with this, we find statistically significant systematic deviations between FOMC projections and professional forecasts for US inflation and GDP growth.

Keywords

Central bank projectionsforward guidancesurvey forecastsmonetary policy

Information

Type
Articles
Information
Macroeconomic Dynamics , Volume 28 , Issue 5 , July 2024 , pp. 1182 - 1205
Copyright
© The Author(s), 2023. Published by Cambridge University Press

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