Imperfect Central Bank Communication: Information versus Distraction

Much of the information communicated by central banks is noisy or imperfect. This paper considers the potential benefits and limitations of central bank communications in a model of imperfect knowledge and learning. It is shown that the value of communicating imperfect information is ambiguous. If the public is able to assess accurately the quality of the imperfect information communicated by a central bank, such communication can inform and improve the public’s decisions and expectations. But if not, communicating imperfect communication has the potential to mislead and distract. The risk that imperfect communication may detract from the public’s understanding should be considered in the context of a central bank’s communications strategy. The risk of distraction means the central bank may prefer to focus its communication policies on the information it knows most about. Indeed, conveying more certain information may improve the public’s understanding to the extent that it "crowds out" a role for communicating imperfect information.Transparency, forecasts, learning

The Taylor rule and real-time data - a critical appraisal

In a number of recent papers, it has been argued that the use of ex post data can distort the picture when trying to analyse monetary policy reaction functions. This paper aims to establish whether the Taylor rule has been a reasonable representation of US monetary policy using both ex post and real-time output gap data. Results show that real-time data generate only minor differences to ex post data and, more interestingly, that the Taylor rule appears to be a questionable tool for evaluation of the Federal Reserve during the investigated samples.

Killing four unit root birds in the US economy with three panel unit root test stones

This study tests for the presence of unit roots in four US macroeconomic time series using panel unit root tests. The Im, Pesaran and Shin (Journal of Econometrics, 115, pp. 53-74, 2003) test, the Multivariate Augmented Dickey-Fuller test (Taylor and Sarno, Journal of International Economics, 46, pp. 281-312, 1998) and the Johansen (Journal of Economic Dynamics and Control, 12, pp. 231-54, 1988) likelihood ratio test are applied to unemployment, the real exchange rate, the nominal interest rate and inflation. The three tests all have ways of controlling the obvious cross-sectional dependence in the panel. Using monthly data from 1960 to 2002 there is evidence that all time series are generated by stationary processes.

The effect on the Swedish real economy of the financial crisis

This article investigates the effects of the financial crisis on the Swedish real economy. In order to do this, an index which describes the financial conditions of the Swedish economy is developed. The index indicates that domestic Swedish financial conditions have deteriorated substantially during 2008 and are now at the highest level since the crisis of the early 1990s. A Bayesian Vector Autoregression (BVAR) model with both US and Swedish variables is used to assess the quantitative effects of the financial crisis on Swedish real Gross Domestic Product (GDP) growth. Results suggest that the growth of the Swedish economy will be substantially slower in the next couple of years due to the financial crisis.

Mean reversion in the US unemployment rate - evidence from bootstrapped out-of-sample forecasts

This article investigates whether the US unemployment rate is best described as a unit-root or mean-reverting process. An out-of-sample forecast exercise is conducted in which the performance of an autoregressive (AR) model with an imposed unit root is compared with that of a mean-reverting AR model. A bootstrap distribution for the relative root mean square forecast error is generated and provides strong support for mean reversion in the US unemployment rate.

The persistent labour-market effects of the financial crisis

This article estimates the effects of the financial crisis on the Swedish labour market. Using an unobserved components model and an external forecast, we estimate a future path for the Nonaccelerating Inflation Rate of Unemployment (NAIRU). Judging by this analysis, the labour market will be in equilibrium again in 2013. Linking the NAIRU to other labour-market variables through an estimated vector error correction model and population projections, it is found that this new equilibrium is associated with a smaller equilibrium labour force and lower equilibrium employment.

Hysteresis and non-linearities in unemployment rates

This study tests whether there is evidence of mean reversion in unemployment rates using the recently developed unit root test of Kapetanios et al. (2003). In this framework, the null hypothesis of a unit root process is tested against the alternative of a globally stationary exponential smooth transition autoregressive process. Applying the test to monthly data for Australia, Canada, Finland, Sweden and the USA, it is concluded that unemployment hysteresis finds less support when non-linearities are allowed for compared to the benchmark of using a standard Augmented Dickey-Fuller test.

A residual-based cointegration test for near unit root variables

Methods of inference based on a unit root assumption in the data are typically not robust to even small deviations from this assumption. In this paper, we propose robust procedures for a residual-based test of cointegration when the data are generated by a near unit root process. A Bonferroni method is used to address the uncertainty regarding the exact degree of persistence in the process. We thus provide a method for valid inference in multivariate near unit root processes where standard cointegration tests may be subject to substantial size distortions and standard OLS inference may lead to spurious results. Empirical illustrations are given by: (i) a re-examination of the Fisher hypothesis, and (ii) a test of the validity of the cointegrating relationship between aggregate consumption, asset holdings, and labor income, which has attracted a great deal of attention in the recent finance literature.Cointegration

The rise and fall of U.S. inflation persistence

This paper estimates the path of inflation persistence in the United States over the last 50 years and draws implications about the evolution of the Federal Reserve's monetary-policy preferences. Standard models of central-bank optimization predict persistent inflation outcomes. Time variation of the central bank's preference for output stability should be reflected in changes in inflation persistence. We estimate an ARMA(1,q) model with a time-varying autoregressive parameter for monthly U.S. inflation data from 1955 to 2006. The coefficients provide an estimate of the inflation target and the path of inflation persistence. The estimated inflation target over the sample is approximately 2.8 percent and we find that inflation persistence declined substantially during Volcker and Greenspan's tenures to a level significantly less than one and significantly below that of the 1970s and early 1980s.Inflation (Finance) ; Monetary policy - United States