The role of central bank forecasts in uncertain times

Abstract

Disclosing macroeconomic projection is one of central bank’s key communication tools shaping expectations, which should facilitate monetary policy transmission mechanism. Existing literature indicates that central banks affect expectations of professional forecasters to a varying degree depending on the forecasted variable, forecast horizon or sample selection. We contribute to this literature by investigating this relationship with a specific focus on the role of uncertainty and inflationary environment for this process. Our estimates from a panel model on individual data show that by announcing its projections, Polish central bank affects inflation and GDP expectations of professional forecasters for all examined projection horizons. Importantly, we document that this impact is stronger in periods of large uncertainty or high inflation, in particular for longer-term horizons. Our results signify that central bank projections help private agents in separating signal from noise as in the Woodford model and provide an anchor for longer-term expectations.