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The Stabilizing Effects of Publishing Strategic Central Bank Projections

Published online by Cambridge University Press:  14 January 2022

Steffen Ahrens*
Affiliation:
Freie Universität Berlin, Department of Economics, Boltzmannstr. 20, 14195 Berlin, Germany.
Joep Lustenhouwer
Affiliation:
Heidelberg University, Bergheimer Strasse 58, 69115 Heidelberg, Germany.
Michele Tettamanzi
Affiliation:
REF Ricerche, Via Aurelio Saffi, 12, 20144 Milano, Italy.
*
*Corresponding author: Steffen Ahrens. Email: steffen.ahrens@fu-berlin.de

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.

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Articles
Copyright
© The Author(s), 2022. Published by Cambridge University Press

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