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The Empirical (Ir)Relevance of the Interest Rate Assumption for Central Bank Forecasts

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  • Knüppel, Malte
  • Schultefrankenfeld, Guido

Abstract

The interest rate assumptions for macroeconomic forecasts differ considerably among central banks. Common approaches are given by the assumption of constant interest rates, interest rates expected by market participants, or the central bank's own interest rate expectations. From a theoretical point of view, the latter should yield the highest forecast accuracy. The lowest accuracy can be expected from forecasts conditioned on constant interest rates. However, when investigating the predictive accuracy of the forecasts for interest rates, inflation and output growth made by the Bank of England and the Banco do Brasil, we hardly find any significant differences between the forecasts based on different interest assumptions. We conclude that the choice of the interest rate assumption, while being a major concern from a theoretical point of view, appears to be at best of minor relevance empirically.

Suggested Citation

  • Knüppel, Malte & Schultefrankenfeld, Guido, 2013. "The Empirical (Ir)Relevance of the Interest Rate Assumption for Central Bank Forecasts," Annual Conference 2013 (Duesseldorf): Competition Policy and Regulation in a Global Economic Order 80042, Verein für Socialpolitik / German Economic Association.
  • Handle: RePEc:zbw:vfsc13:80042
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    1. repec:spr:empeco:v:53:y:2017:i:1:d:10.1007_s00181-016-1182-5 is not listed on IDEAS
    2. Otmar Issing, 2013. "A New Paradigm for Monetary Policy?," International Finance, Wiley Blackwell, vol. 16(2), pages 273-288, June.
    3. Issing, Otmar, 2013. "A new paradigm for monetary policy?," CFS Working Paper Series 2013/02, Center for Financial Studies (CFS).

    More about this item

    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C53 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Forecasting and Prediction Models; Simulation Methods
    • 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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