Are Central Banks' Projections Meaningful?
Central banks' projections-i.e. forecasts conditional on a given interest rate path-are often criticized on the grounds that their underlying policy assumptions are inconsistent with the existence of a unique equilibrium in many forward-looking models. Here I describe three alternative approaches to constructing projections that are not subject to the above criticism, using two different versions of New Keynesian model as reference frameworks. Most importantly, I show how the three approaches generate different projections for inflation and output, even though they imply an identical path for the interest rate. The latter result calls into question the meaning and usefulness of such projections.
I am grateful for comments and suggestions to the editor Marty Eichenbaum, two anonymous referees, Marc Giannoni, Frank Smets, Lars Svensson, Raf Wouters and participants at the CREI Faculty Lunch, SNB Monetary Policy Conference, and SED Meetings (Cambridge, MA). Davide Debortoli and Tomaz Cajner provided excellent research assistance. I am also grateful to the Government of Catalonia and the Ministerio de Ciencia y Tecnología for financial support. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.