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Short-term Inflation Forecasts as an Input for the Formulation of Monetary Policy

Author

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  • Susan Jiménez-Montero

    (Department of Economic Research, Central Bank of Costa Rica)

Abstract

The document characterizes the Central Bank of Costa Rica’s approach to short-term inflation forecasting within the context of an inflation-targeting regime, highlighting its importance as a key input for medium term projections that inform the monetary policy decision-making process. This essay describes (i) the rationale for forecasting under inflation targeting, (ii) the transmission mechanism and the relevant horizon, (iii) the set of methodologies employed—univariate models, Bayesian techniques, factor models (FAVAR), and item-level CPI models—and (iv) the integration and validation process that transforms statistical results into a coherent economic forecast, which feeds into the macroeconomic model and policy recommendations, as well as institutional outputs such as the Monthly Economic Developments Report (IMCE) and the Monetary Policy Report (IPM). Finally, it emphasizes the dynamic nature of the forecasting system, including the exploration of machine learning techniques as a complement to traditional econometric approaches. ***Resumen: Este documento caracteriza el proceso que se implementa en el Banco Central de Costa Rica (BCCR) para la elaboración de pronósticos de inflación de corto plazo en el contexto de un régimen de metas de inflación. Se destaca su importancia como insumo fundamental para generar pronósticos de mediano plazo que informan la toma de decisiones de política monetaria. Este ensayo describe (i) la racionalidad del pronóstico bajo metas de inflación, (ii) el mecanismo de transmisión y el horizonte relevante, (iii) la batería de metodologías empleadas—modelos univariados, técnicas bayesianas, modelos de factores (FAVAR) y modelos por artículo del IPC—y (iv) el proceso de integración y validación que transforma resultados estadísticos en un pronóstico económico coherente, que alimenta el modelo macroeconómico y la recomendación de política, así como productos institucionales como el Informe Mensual de Coyuntura Económica (IMCE) y el Informe de Política Monetaria (IPM). Finalmente, se resalta el carácter dinámico del sistema de pronóstico, y la exploración de nuevos modelos y técnicas como por ejemplo de machine-learning como complemento a los enfoques econométricos tradicionales.

Suggested Citation

  • Susan Jiménez-Montero, 2026. "Short-term Inflation Forecasts as an Input for the Formulation of Monetary Policy," Ensayos de Política Económica 2603, Banco Central de Costa Rica.
  • Handle: RePEc:apk:epolec:2603
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    File URL: https://repositorioinvestigaciones.bccr.fi.cr/handle/20.500.12506/530
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    References listed on IDEAS

    as
    1. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
    2. Mark W. Watson & James H. Stock, 2004. "Combination forecasts of output growth in a seven-country data set," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 23(6), pages 405-430.
    3. Frederic S. Mishkin, 2009. "Monetary Policy Strategy," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262513374, December.
    4. Susan Athey, 2018. "The Impact of Machine Learning on Economics," NBER Chapters, in: The Economics of Artificial Intelligence: An Agenda, pages 507-547, National Bureau of Economic Research, Inc.
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    Keywords

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    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models

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