How forward-looking are central banks? Some evidence from their forecasts

Abstract

We estimate forward-looking Taylor rules on data from macroeconomic forecasts of three central banks in order to determine the extent to which these banks are forward-looking. We find that all three banks are to some extent forward-looking, albeit to a varying degree. In general, the horizons for inflation seem to be longer than for output. We also find that central banks prefer to concentrate on one particular horizon rather than take into account the whole forecast.

Keywords:

• targeting rules
• forward-looking monetary policy
• central bank forecasts

JEL Classification:

• C25
• E52
• E58

Notes

¹ Still, it should be mentioned that a part of the theoretical literature questions the benefits of forward-looking behaviour (Woodford, 2000; Clarida et al., 2001). Leitemo (2008) shows in a new Keynesian model that if agents are forward-looking the central bank should be backward-looking and vice versa.

² The SNB switched to exchange rate targeting in the last quarter of our sample.

³ With the exception of SNB where the decisions are made usually once a quarter.

⁴ For example, Eichengreen et al. (1985), Davutyan and Parke (1995), Gascoigne and Turner (2004), Carstensen (2006) and Kotłowski (2006).

⁵ We also tested larger values, but they were clearly rejected by the data.