Monetary policy announcements and expectations: the case of Mexico

This paper was produced as part of the Final Conference of the BIS-CCA Research Network on "Monetary policy frameworks and communication (2019-2022)".

Summary

Focus

Under inflation targeting regime, the effectiveness of monetary policy depends on public understanding of central banks' decisions, since expectations are a key channel of the transmission mechanism from policy actions to the economy. Here, private sector analysts play an important role and they shape their expectations in response to central bank announcements and data releases. Thus, it is important to study how private analysts' expectations react to new data and monetary policy decisions.

Contribution

We study the effects of Mexico's Central Bank monetary policy decisions on the expectations about inflation and monetary policy rate of private forecasters. We used a novel survey with economic variables expectations such as inflation and the policy rate from economic analysts and we estimate a fixed effect model at analyst level using a panel. We study the differences in expectations before and after a monetary policy announcement.

Findings

We find that professional forecasters ''listen'' to the central bank. In other words, the changes in their short-run expectations are different when there are monetary policy announcements. Inflation surprises affect short-term inflation expectations but do not affect long-term inflation expectations suggesting anchored inflation expectations. Additionally, monetary policy surprises have an impact on end-of-the-year inflation expectations and reference rate expectations.

Abstract

In this paper we study the effects of Mexico's Central Bank monetary policy decisions on the expectations about inflation and monetary policy rate expectations of private forecasters. We estimate a fixed effect model at analyst level using a panel of professional forecasters from 2010 to 2017. We study the differences in expectations before and after a monetary policy announcement and we compare them when there are no announcements. We find that professional forecasters "listen" to the central bank, i.e. the changes in their short-run expectations are different when there are monetary policy announcements. Also, we find that analysts' surprises in realized inflation affect short-term inflation expectations but do not affect long-term inflation expectations suggesting anchored inflation expectations. Aditionally, monetary policy surprises have an impact on end-of-the-year inflation expectations and reference rate expectations.

JEL classification: E43, E59, D84, C83.

Keywords: central bank communication, survey microdata, monetary policy interest rate expectations.