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Steinar Holden Department of Economics, University of Oslo folk.uio.no/sholden/ Norges Bank

Inflation targeting and private sector forecast - comment on paper by S. Cecchetti and C. S. Haikko. Steinar Holden Department of Economics, University of Oslo http://folk.uio.no/sholden/ Norges Bank 12 June 2009. Research question.

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Steinar Holden Department of Economics, University of Oslo folk.uio.no/sholden/ Norges Bank

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  1. Inflation targeting and private sector forecast - comment on paper by S. Cecchetti and C. S. Haikko Steinar Holden Department of Economics, University of Oslo http://folk.uio.no/sholden/ Norges Bank 12 June 2009

  2. Research question • Does increased transparency – in the form of Inflation Targeting – lead to lower dispersion of private sector inflation forecast? Motivation: • Morris & Shin: Greater transparency may be harmfull if private agents overreact to signals from CB • Svensson; Woodford: Theoretical result, with little practical relevance • Yet policymakers worry that more information may cause coordination of private expectations, making the economy more exposed to commons shocks.

  3. Research question – II • Link to Morris & hin is not convincing • Arguments of Svensson & Woodford are forceful • Coordination of inflation forecasts seems beneficial • Coordination errors are costly • One of the gains of lower inflation is less inflation uncertainty • Private information can be gathered in other ways, e.g. by regional networks • Still interesting to know effects of IT on dispersion of inflation forecasts

  4. Empirical results SUR estimates • Most countries: no significant effect of IT • More forecast dispersion under IT in Spain, Norway and Switzerland Panel regressions: • Small negative effect of IT on forecast dispersion with fixed effects • Mixed results with random effects

  5. Why doesn’t Inflation Targeting lead to lower forecast dispersion? • Chance: More shocks under IT period • Compare with forecast properties of univariate AR • Can inflation be more difficult to predict even if it is more stable? • Assume that inflation depends on wage growth and exchange rate • Effect of wage growth easier to predict than effect of exchange rate • IT leads to less volatility of wage growth and more volatility of exchange rate • May make inflation less volatile but more difficult to predict • Long run inflation credibility allows for less aggressive IT in the short run • More difficult to predict inflation

  6. Conclusion • Fine paper, with useful empirical evidence on very interesting issue • Suggest change of motivation for paper • Explore effect of IT on different sources of inflation variability

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