What Do Central Banks Know about Inflation Factors?
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We offer a novel methodology for assessing the quality of central bank monetary policy reports. We evaluate their economic content by comparing verbally reported inflation factors with factors identified from a simple new Keynesian model. Positive correlations indicate that the reported inflation factors were similar to the model-identified ones, marking high-quality inflation reports. Although sample bank reports on average identified inflation factors correctly, the degree of forward-looking reporting varied.
KeywordsInflation targeting Kalman filter Monetary policy communication
JEL ClassificationE17 E31 E32 E37
Support from the CNB and the Czech Science Foundation – Research Grant No. 402/11/1487 – is gratefully acknowledged. We are thankful for comments from an anonymous referee, Ray Brooks, Michael Ehrmann, Paul Jenkins, David-Jan Jansen, Gábor Pellényi, Stephanie Schmitt-Grohé, and Pierre Siklos and from participants at the 13th Annual VERC Conference at Waterloo, and IMF and CNB seminars. Keith Miao, Radu Păun, Rungporn Roengpitya, and Caroline Silverman provided excellent research assistance. The views expressed in this paper are those of the authors.
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