Central Bank Forecasts and Disclosure Policy: Why it Pays to Be Optimistic

30 Pages Posted: 11 May 2005

See all articles by Sylvester C. W. Eijffinger

Sylvester C. W. Eijffinger

Tilburg University (CentER) - Department of Economics; CESifo (Center for Economic Studies and Ifo Institute); Centre for Economic Policy Research (CEPR)

M. F. Tesfaselassie

Kiel Institute for the World Economy

Date Written: January 2005

Abstract

In a simple macromodel with forward-looking expectations, this Paper looks into disclosure policy when a central bank has private information on future shocks. The main result is that advance disclosure of forecasts of future shocks does not improve welfare, and in some cases is not desirable as it impairs stabilization of current inflation and/or output. This result holds when there is no credibility problem or the central bank's preference is common knowledge. When there is uncertainty about the central bank's preference shock, and this uncertainty is not resolved in the subsequent period, advance disclosure does not matter for current outcomes. The reason lies in the strong dependence of one-period-ahead private sector inflation forecasts on central bank actions, which induces the central bank to focus exclusively on price stability in subsequent periods. Another implication of the model is that, in contrast to forecasts of current period shocks emphasized by the literature, forecasts of future shocks may not be revealed to the public by current policy choices because the central bank refrains from responding to its own forecasts.

Keywords: Forward-looking expectations, private information, central bank forecasts, central bank disclosure, central bank transparency

JEL Classification: E42, E43, E52, E58

Suggested Citation

Eijffinger, Sylvester C. W. and Tesfaselassie, Mewael F., Central Bank Forecasts and Disclosure Policy: Why it Pays to Be Optimistic (January 2005). Available at SSRN: https://ssrn.com/abstract=721591

Sylvester C. W. Eijffinger (Contact Author)

Tilburg University (CentER) - Department of Economics ( email )

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CESifo (Center for Economic Studies and Ifo Institute)

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Centre for Economic Policy Research (CEPR)

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Mewael F. Tesfaselassie

Kiel Institute for the World Economy ( email )

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Kiel, Schleswig-Hosltein D-24100
Germany