The Reserve Bank's forecasting performance
AbstractFor 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.
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Bibliographic InfoArticle provided by Reserve Bank of New Zealand in its journal Reserve Bank of New Zealand Bulletin.
Volume (Year): 65 (2002)
Issue (Month): (December)
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- 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.
- 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.
- William T. Gavin & Rachel J. Mandal, 2002.
"Evaluating FOMC forecasts,"
2001-005, Federal Reserve Bank of St. Louis.
- 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.
- Michal Skorepa & Viktor Kotlan, 2003.
"Inflation Targeting: To Forecast or to Simulate?,"
Research and Policy Notes
2003/01, Czech National Bank, Research Department.
- 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.
- 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.
- 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.
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