RDP 2017-02: Anticipatory Monetary Policy and the ‘Price Puzzle’ Appendix C: Forecast Data and Alternative Specifications

This appendix provides further details of the forecast data used for our baseline specification and the 12 alternative specifications discussed in Sections 3 and 5.

Baseline specification

Our baseline specification uses RBA forecasts, as documented by Tulip and Wallace (2012). The status, nature and timing of these have changed over time. Since 2007, inflation and output forecasts have been prepared for the SMP, published a few days after the February, May, August and November Board meetings. Between mid 1998 and late 2007, GDP forecasts were those prepared for the Joint Economic Forecasting Group (JEFG) meetings, held in March, June, September and December. Over the same period, inflation forecasts are those for SMP.

We allocate both the inflation and GDP forecasts to the mid-quarter (i.e. forecast-month) meetings, rather than the end-quarter (i.e. JEFG-month) meetings during 1998–2007. We do this because the cash rate was more likely to be adjusted during forecast-month meetings and because our interest is primarily in estimating the effects of monetary policy on inflation, rather than GDP. However, this decision does create a problem in that the GDP forecasts in particular may embody the effects of the policy decision taken in the mid-quarter meeting and any new data. However, our baseline results are not qualitatively affected if we re-estimate our models using cash rate changes in end-quarter Board meetings over this period.

Prior to 1998, both the inflation forecasts and GDP forecasts in the Tulip and Wallace dataset were those prepared for the JEFG meetings, and thus our measure of interest rates changes refers to the end-quarter Board meetings for this period.

Approach 8

Consensus Economics has conducted a monthly survey of two dozen private sector forecasters since 1990. The survey provides calendar-year average forecasts for real GDP growth and year-ended forecasts (to December quarter) for CPI inflation. The advantage of Consensus forecasts relative to official RBA forecasts is that the former are actively updated every month, while the RBA only undertakes a formal forecasting round once per quarter.

For this approach, the first-stage regression includes the current and following years' Consensus forecasts for GDP growth and headline inflation, and the revisions to these forecasts relative to the previous month's survey. We also include dummies for the calendar month of the Board meeting, to control for the fact that the horizon of the forecasts will depend on the calendar month. For example, the forecast for the current calendar year made in January will relate to the next 12 months, while the forecast made in December will largely incorporate data already received. For Board meetings held in February, it is not possible to define a revision to the following year's forecast; for these observations, we set the missing forecast data to zero. The dummy for the calendar month of February will absorb the fact that we set the revisions to zero. We omit the unemployment rate.

Approach 9

Since Consensus and official RBA forecasts are not available prior to 1990, we use Business Review Weekly's (BRW) survey of market economist forecasts to include the period from 1985 to 1990. BRW's survey was conducted once per quarter, typically during the final month of the quarter, and provided financial-year average forecasts for GDP growth and year-ended forecasts for headline CPI (to June quarter).

While BRW provided forecasts for both the current year and following years, the time-series data is only complete for the current-year forecasts. In cases where forecasts for the following year are missing, we set these observations equal to zero and include a dummy that equals one if the data are missing, and zero otherwise. From 1991 onwards, we use the Consensus survey of market economist forecasts.

We assign each forecast, whether Consensus or BRW, to the closest Board meeting, ensuring that the forecasts were always generated prior to the meeting. To do this, we use the precise date on which the survey was administered and the date of the Board meeting in question. After 1990, which is the period in which we have monthly forecasts from Consensus, the forecasts were generated on average 23 days prior to each meeting. The time lag between the publication of the forecasts and the relevant Board meeting was longer prior to 1990 – averaging 53 days – and more variable, due to the quarterly frequency of the BRW survey. This long time lag means that we cannot control for anticipatory policy as effectively prior to 1990. We include a control for this time lag (in days) in the first-stage regression. As with Approach 8, we also include a full set of month dummies in the first stage.

The first-stage regression uses data on every Board meeting since October 1985, giving 330 observations. Since the Bank only began announcing cash rate outcomes from 1990 onwards, for the period before January 1990 we approximate the change in the target cash rate using the change in the actual cash rate. Specifically, we use the change in the interbank rate that prevailed immediately before the current meeting to the interbank rate that prevailed immediately prior to the subsequent meeting, using three-day averages to smooth out volatility in the data. We extract the residuals from this regression as our measure of policy shocks and aggregate the shocks to quarterly frequency by summing across all meetings in the quarter.

Approaches 10 and 11

In addition to the forecast-based procedure in Romer and Romer (2004), we can also identify policy shocks using measures of the surprise component of monetary policy decisions.

We follow Kearns and Manners (2005) in using daily changes in yields on 1- or 3-month bank bills to measure the policy surprise. Since our data on output and inflation are at quarterly frequency, we construct a quarterly measure of policy surprises summing across all surprises in the quarter. We do not use futures contracts over the cash rate to estimate policy surprises because intraday data on ASX 30-day interbank cash rate futures are only available from 2003 onwards.