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Coordinating expectations through central bank projections

ABSTRACT: Central banks are increasingly communicating their economic outlook in an effort to manage the public and financial market participants’ expectations. We provide original causal evidence that the information communicated and the assumptions underlying a central bank’s projection can matter for expectation formation and aggregate stability. Using a between-subject design, we systematically vary the central bank’s projected forecasts in an experimental macroeconomy where subjects are incentivized to forecast the output gap and inflation. Without projections, subjects exhibit a wide range of heuristics, with the modal heuristic involving a significant backward-looking component. Ex-Ante Rational dual projections of the output gap and inflation significantly reduce the number of subjects’ using backward-looking heuristics and nudge expectations in the direction of the rational expectations equilibrium. Ex-Ante Rational interest rate projections are cognitively challenging to employ and have limited effects on the distribution of heuristics. Adaptive dual projections generate unintended inflation volatility by inducing boundedly-rational forecasters to employ the projection and model-consistent forecasters to utilize the projection as a proxy for aggregate expectations. All projections reduce output gap disagreement but increase inflation disagreement. Central bank credibility is significantly diminished when the central bank makes larger forecast errors when communicating a relatively more complex projection. Our findings suggest that inflation-targeting central banks should strategically ignore agents’ irrationalities when constructing their projections and communicate easy-to-process information.

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The online version of this article (10.1007/s10683-020-09684-6) contains supplementary material, which is available to authorized users.

SUBMITTER: Mokhtarzadeh F

PROVIDER: S-EPMC8550474 | biostudies-literature |

REPOSITORIES: biostudies-literature

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Project description:Simulation of future climate changes, especially temperature and rainfall, is critical for water resource management, disaster mitigation, and agricultural development. Based on the category-wise indicator method, two preferred Global Climate Models (GCMs) for the Ishikari River basin (IRB), the socio-economic center of Hokkaido, Japan, were examined from the newly released Coupled Model Intercomparison Project Phase 6 (CMIP6). Climatic variables (maximum/minimum temperature and precipitation) were projected by the Statistical DownScaling Model (SDSM) under all shared socioeconomic pathway-representative concentration pathway (SSP-RCP) scenarios (SSP1-1.9, SSP1-2.6, SSP2-4.5, SSP3-7.0, SSP4-3.4, SSP4-6.0, SSP5-3.4OS, and SSP5-8.5) in two phases: 2040-2069 (2040s) and 2070-2099 (2070s), with the period of 1985-2014 as the baseline. Predictors of SDSM were derived from CMIP6 GCMs and the reanalysis dataset NOAA-CIRES-DOE 20th Century Reanalysis V3 (20CRv3). Results showed that CMIP6 GCMs had a significant correlation with temperature measurements, but could not represent precipitation features in the IRB. The constructed SDSM could capture the characteristics of temperature and precipitation during the calibration (1985-1999) and validation (2000-2014) phases, respectively. The selected GCMs (MIROC6 and MRI-ESM-2.0) generated higher temperature and less rainfall in the forthcoming phases. The SSP-RCP scenarios had an apparent influence on temperature and precipitation. High-emission scenarios (i.e., SSP5-8.5) would project a higher temperature and lower rainfall than the low-emission scenarios (e.g., SSP1-1.9). Spatial-temporal analysis indicated that the northern part of the IRB is more likely to become warmer with heavier precipitation than the southern part in the future. Higher temperature and lower rainfall were projected throughout the late twenty-first century (2070s) than the mid-century (2040s) in the IRB. The findings of this study could be further used to predict the hydrological cycle and assess the ecosystem's sustainability.

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Coordinating expectations through central bank projections

Electronic supplementary material

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