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Rationalizing the bias in central banks´ interest rate projections

  • In this paper, we study the bias in interest rate projections for four central banks, namely for Czech Republic, New Zealand, Norway, and Sweden. We examine whether central bank projections are based on an asymmetric loss function and report evidence that central banks perceive an overprojection of their longer-term interest rate forecasts as twice as costly as an underprojection of the same size. We document that rationality is consistent with biased interest rate projections which contribute to explaining the central banks’ behavior.

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Author:Michael Frenkel, Jin-Kyu Jung, Jan-Christoph Rülke
Series (Serial Number):WHU – Working Paper Series in Economics (WP 17/03)
Publisher:WHU - Otto Beisheim School of Management
Place of publication:Vallendar
Document Type:Working Paper
Date of Publication (online):2017/06/08
Publishing Institution:WHU - Otto Beisheim School of Management
Release Date:2017/06/08
Tag:Asymmetrischer Verlust; Kommunikation; Zentralbank; Zinsprognose
Asymmetric loss; Central bank; Communication; Interest rate forecast
Issue:WP 17/03
Institutes:WHU Economics Group / Chair of Macroeconomics and International Economics
JEL-Classification:E Macroeconomics and Monetary Economics / E4 Money and Interest Rates / E43 Determination of Interest Rates; Term Structure of Interest Rates
E Macroeconomics and Monetary Economics / E4 Money and Interest Rates / E47 Forecasting and Simulation
E Macroeconomics and Monetary Economics / E5 Monetary Policy, Central Banking, and the Supply of Money and Credit / E58 Central Banks and Their Policies
Licence (German):Copyright for this publication