Advanced Search
MyIDEAS: Login to save this article or follow this journal

The Reserve Bank's forecasting performance


Author Info

  • Sharon McCaw
  • Satish Ranchhod

    (Reserve Bank of New Zealand)

Registered author(s):


    For most of the period since 1994, the target range for annual Consumers Price Index (CPI) inflation, established by the Policy Targets Agreements (PTA), was 0 to 3 per cent. Over this period, actual CPI inflation has averaged 2 per cent. As one might expect, analysis shows that our medium-term CPI inflation forecasts since 1994 have been biased towards under-prediction, which is the subject of this article. In any particular period, inflation is unlikely to be exactly as forecast, given that the economy is affected by unforeseeable events and inflation is far from perfectly controllable. However, it is important to have a good understanding of why inflation has evolved as it has, and not as predicted. We need to know whether particular events in the period under consideration have dominated inflation outcomes, or whether there is a fundamental problem with the policy process - such as a fundamental misunderstanding of the workings of the economy - that would systematically affect future monetary policy outcomes unless corrected. In this article we focus particularly on our CPI inflation forecasting performance, but also examine our forecasts of other key macroeconomic variables, given their relevance for explaining our CPI forecasts. We conclude that, in the mid-1990s, underestimation of growth, and overestimation of the economy's capacity to grow without generating inflation pressures, were the source of most of our under-prediction of medium-term CPI inflation. From 1998 until recently, the major factor explaining the under-prediction of inflation appears to have been sizeable and persistent differences between the assumptions we used for the path of the exchange rate and its actual evolution. We also conclude that contributions to forecast inaccuracies have at times been made by our understanding of the noninflationary output growth rate, the equilibrium exchange rate and exchange rate pass-through into CPI inflation. However, these factors do not appear to be systematic sources of inflation forecast bias.

    Download Info

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
    File URL:
    Download Restriction: no

    Bibliographic Info

    Article provided by Reserve Bank of New Zealand in its journal Reserve Bank of New Zealand Bulletin.

    Volume (Year): 65 (2002)
    Issue (Month): (December)

    as in new window
    Handle: RePEc:nzb:nzbbul:december2002:1

    Contact details of provider:
    Postal: P.O. Box 2498, Wellington
    Phone: 64 4 471-3767
    Fax: 64 4 471-2270
    Web page:
    More information through EDIRC

    Related research



    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. Mike Frith & Aaron Drew, 1998. "Forecasting at the Reserve Bank of New Zealand," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 61, December.
    2. Aaron Drew & Adrian Orr, 1999. "The Reserve Bank's role in the recent business cycle: actions and evolutions," Reserve Bank of New Zealand Bulletin, Reserve Bank of New Zealand, vol. 62, March.
    3. William T. Gavin & Rachel J. Mandal, 2002. "Evaluating FOMC forecasts," Working Papers 2001-005, Federal Reserve Bank of St. Louis.
    Full references (including those not matched with items on IDEAS)


    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    1. Clemens J.M. Kool & Daniel L. Thornton, 2012. "How effective is central bank forward guidance?," Working Papers 2012-063, Federal Reserve Bank of St. Louis.
    2. Michal Skorepa & Viktor Kotlan, 2003. "Inflation Targeting: To Forecast or to Simulate?," Research and Policy Notes 2003/01, Czech National Bank, Research Department.
    3. Dominick Stephens, 2006. "Should monetary policy attempt to reduce exchange rate volatility in New Zealand?," Reserve Bank of New Zealand Discussion Paper Series DP2006/05, Reserve Bank of New Zealand.
    4. Özer Karagedikli & Pierre L. Siklos, 2008. "Explaining Movements in the NZ Dollar - Central Bank Communication and the Surprise Element in Monetary Policy?," Reserve Bank of New Zealand Discussion Paper Series DP2008/02, Reserve Bank of New Zealand.
    5. Philip Liu, 2004. "Improving implementation of inflation targeting in New Zealand: an investigation of the Reserve Bank's inflation errors," Reserve Bank of New Zealand Discussion Paper Series DP 2004/06, Reserve Bank of New Zealand.


    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.


    Access and download statistics


    When requesting a correction, please mention this item's handle: RePEc:nzb:nzbbul:december2002:1. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Reserve Bank of New Zealand Knowledge Centre).

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.