Central bank forecasts and policy

The paper studies welfare implications of publishing by a central bank projections of its own policy decisions in an agent-based model with heterogeneous households. The standard approach is to assume that the central bank maximizes an ad hoc welfare function, which is usually a quadratic function in inflation and employment. This work, on the other hand, is based on an explicit general equilibrium modeling. This approach allows us to address the welfare issue in a more precise way. In a dynamic stochastic general equilibrium model of an open economy with a central bank and a heterogeneous population, the central bank maximizes a weighted average of utilities of heterogeneous agents. Agents differ across two dimensions: (i) instantaneous preferences with respect to consumption and leisure, and (ii) wealth. The central bank's type changes over time and characterized by the way it weighs utilities of agents in its maximization problem. Two possible monetary policy regimes, transparent and opaque, are analyzed and compared. Under the transparent regime, the central bank preferences are revealed to private agents, but under the opaque one they are not. The benchmark welfare function puts equal weight to every agent. The welfare outcomes of the two regimes are compared against the benchmark case. The paper finds conditions on parameters of the model when the transparent regime dominates the opaque one. It depends on the regime in the foreign country and preference parameter for foreign goods in the utility of domestic consumers. The analysis also identifies winners and losers under each policy regime.