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Evaluating a Central Bank’s Recent Forecast Failure

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Abstract

Failures are not rare in economic forecasting, probably due to the high incidence of shocks and regime shifts in the economy. Thus, there is a premium on adaptation in the forecast process, in order to avoid sequences of forecast failure. This paper evaluates a sequence of inflation forecasts in the Norges Bank Inflation Report, and we present automatized forecasts which are unaffected by forecast failure. One conclusion is that the Norges Bank fan-charts are too narrow, giving an illusion of very precise forecasts. The automatized forecasts show more adaptation once shocks have occurred than is the case for the official forecasts. On the basis of the evidence, the recent inflation forecast failure appears to have been largely avoidable. The central bank’s understanding of the nature of the transmission mechanism and of the strenght and nature of the disinflationly shock that hit the economy appear to have played a major role in the recent forecast failure.

Suggested Citation

  • Nymoen, Ragnar, 2005. "Evaluating a Central Bank’s Recent Forecast Failure," Memorandum 22/2005, Oslo University, Department of Economics.
  • Handle: RePEc:hhs:osloec:2005_022
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    File URL: http://www.sv.uio.no/econ/english/research/unpublished-works/working-papers/pdf-files/2005/Memo-22-2005.pdf
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    1. Neil R. Ericsson, 2001. "Forecast uncertainty in economic modeling," International Finance Discussion Papers 697, Board of Governors of the Federal Reserve System (U.S.).
    2. Gunnar Bardsen & Eilev Jansen & Ragnar Nymoen, 2002. "Model Specification and Inflation Forecast Uncertainty," Annals of Economics and Statistics, GENES, issue 67-68, pages 495-517.
    3. Øyvind Eitrheim & Eilev S. Jansen & Ragnar Nymoen, 2002. "Progress from forecast failure -- the Norwegian consumption function," Econometrics Journal, Royal Economic Society, vol. 5(1), pages 40-64, June.
    4. Bardsen, Gunnar & Eitrheim, Oyvind & Jansen, Eilev S. & Nymoen, Ragnar, 2005. "The Econometrics of Macroeconomic Modelling," OUP Catalogue, Oxford University Press, number 9780199246502.
    5. Gunnar Bardsen & Eilev S. Jansen & Ragnar Nymoen, 2003. "Econometric inflation targeting," Econometrics Journal, Royal Economic Society, vol. 6(2), pages 430-461, December.
    6. Granger,Clive W. J., 1999. "Empirical Modeling in Economics," Cambridge Books, Cambridge University Press, number 9780521662086, March.
    7. Gunnar Bårdsen & Ragnar Nymoen, 2003. "Testing Steady-State Implications for the NAIRU," The Review of Economics and Statistics, MIT Press, vol. 85(4), pages 1070-1075, November.
    8. Michael P. Clements & David F. Hendry, 2002. "Modelling methodology and forecast failure," Econometrics Journal, Royal Economic Society, vol. 5(2), pages 319-344, June.
    9. Michael P. Clements & David F. Hendry, 2001. "Forecasting Non-Stationary Economic Time Series," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262531895, January.
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    More about this item

    Keywords

    Inflation forecasts; Monetary policy; Forecast uncertainty; Fan-charts; Structural change; Econometric models.;

    JEL classification:

    • 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
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • E37 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Forecasting and Simulation: Models and Applications
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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