Title: On central banks response to developments in the global economy
Authors: Hilde Bjornland - BI Norwegian Business School (Norway)
Leif Anders Thorsrud - Norges Bank (Norway)
Sepideh Zahiri - BI Norwegian Business School (Norway) [presenting]
Abstract: Our result suggests that central banks are not responding timely to developments in the global economy. To arrive at this conclusion we construct a real-time data set of interest rate projections from central banks in three small open economies; New Zealand, Norway, and Sweden, and analyse if revisions to these projections can be predicted by timely information. We find a systematic role for forward looking international indicators in predicting the revisions to the interest rate projections. In contrast, using similar indexes for the domestic economy yields insignificant results. Furthermore, we find that the interest rate revisions matters! Constructing a measure of monetary policy shocks based on the forecast errors in each country, we show that financial variables react on impact to the monetary policy shocks, while there is an instant and gradual decline in output and inflation.