Prediction Bias and Undershooting of the Inflation Target
In: Evaluation of the Fulfilment of the CNB's Inflation Targets 1998-2007
This paper is primarily concerned with assessing the bias of the CNB's predictions in relation to undershooting of the inflation target. We conclude, that the inflation prediction error has decreased over time. We further point out that the GDP growth respectively interest rates were above respectively below the forecast most of the time, even in the situation of systematic undershooting of the target. Thus, undershooting then cannot be explained with the help of standard demand mechanisms and positive supply impulses were admittedly underestimated in the past. According to our findings, about half of the apparent amount of target undershooting in 2003 was to be attributed to errors in exogenous factor (foreign interest rates, GDP and inflation) predictions. As follows from the distribution of inflation prediction errors across separate price segments, overpredictions of inflation during a prevailing portion of the period under review were to be attributed to mistakes in prediction of food prices and core CPI ex food, while prediction errors in energy prices mostly rather helped to approach the target. Prediction errors in regulated prices were acting in both directions.
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- Juraj Antal & Michal Hlavacek & Tomas Holub, 2008. "Basic Characteristics of Inflation Targeting in the Czech Republic," Occasional Publications - Chapters in Edited Volumes,in: Katerina Smidkova (ed.), Evaluation of the Fulfilment of the CNB's Inflation Targets 1998-2007, chapter 2, pages 18-34 Czech National Bank, Research Department.
- Gavin, William T. & Mandal, Rachel J., 2003.
"Evaluating FOMC forecasts,"
International Journal of Forecasting,
Elsevier, vol. 19(4), pages 655-667.
- William T. Gavin & Rachel J. Mandal, 2002. "Evaluating FOMC forecasts," Working Papers 2001-005, Federal Reserve Bank of St. Louis.
- Jan Babecky & Jiri Podpiera, 2008. "Inflation Forecasts Errors in the Czech Republic: Evidence from a Panel of Institutions," Occasional Publications - Chapters in Edited Volumes,in: Katerina Smidkova (ed.), Evaluation of the Fulfilment of the CNB's Inflation Targets 1998-2007, chapter 6, pages 77-85 Czech National Bank, Research Department.
- Horváth, Roman, 2009. "The time-varying policy neutral rate in real-time: A predictor for future inflation?," Economic Modelling, Elsevier, vol. 26(1), pages 71-81, January.
- Roman Horvath, 2007. "The Time-Varying Policy Neutral Rate in Real Time: A Predictor for Future Inflation?," Working Papers 2007/4, Czech National Bank, Research Department.
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