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The accuracy of a forecast targeting central bank

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  • Falch, Nina Skrove
  • Nymoen, Ragnar

Abstract

This paper evaluates inflation forecasts made by Norges Bank which is recognized as a successful forecast targeting central bank. It is reasonable to expect that Norges Bank produces inflation forecasts that are on average better than other forecasts, both 'naïve' forecasts, and forecasts from econometric models outside the central bank. The authors find that the superiority of the Bank's forecast cannot be asserted, when compared with genuine ex-ante real time forecasts from an independent econometric model. The 1-step Monetary Policy Report forecasts are preferable to the 1-step forecasts from the outside model, but for the policy relevant horizons (4 to 9 quarters ahead), the forecasts from the outsider model are preferred with a wider margin. An explanation in terms of too high speed of adjustment to the inflation target is supported by the evidence. Norges Bank's forecasts are convincingly better than 'naïve' forecasts over the second half of our sample, but not over the whole sample, which includes a change in the mean of inflation. --

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Bibliographic Info

Paper provided by Kiel Institute for the World Economy in its series Economics Discussion Papers with number 2011-6.

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Date of creation: 2011
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Handle: RePEc:zbw:ifwedp:20116

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Keywords: inflation forecasts; monetary policy; forecast comparison; forecast targeting central bank; econometric models;

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References

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  1. Clements Michael P. & Hendry David F., 2008. "Economic Forecasting in a Changing World," Capitalism and Society, De Gruyter, De Gruyter, vol. 3(2), pages 1-20, October.
  2. Richard Clarida & Jordi Galí & Mark Gertler, 1997. "The science of monetary policy: A new Keynesian perspective," Economics Working Papers, Department of Economics and Business, Universitat Pompeu Fabra 356, Department of Economics and Business, Universitat Pompeu Fabra, revised Apr 1999.
  3. Nymoen, Ragnar, 1989. " Wages and the Length of the Working Day. An Empirical Test Based on Norwegian Quarterly Manufacturing Data," Scandinavian Journal of Economics, Wiley Blackwell, Wiley Blackwell, vol. 91(3), pages 599-612.
  4. Eitrheim,O. & Jansen,E.S. & Nymoen,R., 2000. "Progress from forecast failure : the Norwegian consumption function," Memorandum, Oslo University, Department of Economics 32/2000, Oslo University, Department of Economics.
  5. Mu-Chun Wang, 2009. "Comparing the DSGE model with the factor model: an out-of-sample forecasting experiment," Journal of Forecasting, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 28(2), pages 167-182.
  6. Rubaszek, Michal & Skrzypczynski, Pawel, 2008. "On the forecasting performance of a small-scale DSGE model," International Journal of Forecasting, Elsevier, Elsevier, vol. 24(3), pages 498-512.
  7. Gunnar Bardsen & Eilev S. Jansen & Ragnar Nymoen, 2003. "Econometric inflation targeting," Econometrics Journal, Royal Economic Society, Royal Economic Society, vol. 6(2), pages 430-461, December.
  8. Bardsen, Gunnar & Eitrheim, Oyvind & Jansen, Eilev S. & Nymoen, Ragnar, 2005. "The Econometrics of Macroeconomic Modelling," OUP Catalogue, Oxford University Press, Oxford University Press, number 9780199246502, October.
  9. Karsten R. Gerdrup & Anne Sofie Jore & Christie Smith & Leif Anders Thorsrud, 2009. "Evaluating ensemble density combination - forecasting GDP and inflation," Working Paper, Norges Bank 2009/19, Norges Bank.
  10. Akram, Q. Farooq & Nymoen, Ragnar, 2007. "Model selection for monetary policy analysis How important is empirical validity?," Memorandum, Oslo University, Department of Economics 14/2007, Oslo University, Department of Economics.
  11. Michael Woodford, 2007. "The Case for Forecast Targeting as a Monetary Policy Strategy," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 21(4), pages 3-24, Fall.
  12. Athanasios Orphanides, 1998. "Monetary policy evaluation with noisy information," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 1998-50, Board of Governors of the Federal Reserve System (U.S.).
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Cited by:
  1. Jennifer L. Castle & Jurgen A. Doornik & David F. Hendry & Ragnar Nymoen, 2012. "Mis-specification Testing: Non-Invariance of Expectations Models of Inflation," Working Paper Series, The Rimini Centre for Economic Analysis 50_12, The Rimini Centre for Economic Analysis.
  2. Pierdzioch, Christian & Rülke, Jan-Christoph & Stadtmann, Georg, 2012. "On the loss function of the Bank of Canada: A note," Economics Letters, Elsevier, Elsevier, vol. 115(2), pages 155-159.

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