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Forecasting, analysis and policy process in inflation targeting. Jaromír Hurník (jaromir.hurnik @cnb.c z) Monetary policy division Czech National Bank. Outline. 1. Forecast objective 2. Current practices 3. Elements of the process 4. Summary and challenges.

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Forecasting analysis and policy process in inflation targeting

Forecasting, analysis and policy process in inflation targeting

Jaromír Hurník

([email protected])

Monetary policy division

Czech National Bank


Outline
Outline targeting

1. Forecast objective

2. Current practices

3. Elements of the process

4. Summary and challenges


1 objective of the forecast i
1. Objective of the Forecast - I targeting

  • IT implies a medium-term approach

  • necessary to have consistent and clear methods to derive a forecast for inflation

  • important also externally - want forward looking agents to form expectations according to systematic reactions of CB (show you are systematic!)


1 objective of the forecast ii
1. Objective of the Forecast - II targeting

  • Present a consistent view of

    • where the economy is, and what the current trends are

    • what are their likely evolution into the future

    • what are the implicit risks

    • what are the underlying pressures in terms of policy


1 objective of the forecast iv
1. Objective of the Forecast - IV targeting

  • Transparency requires broad involvement of all the staff with clearly defined roles in the process

  • Efficiency requires use of a common language among the staff

    • role of a core model

  • and open architecture

    • flexibility to incorporate various views and alternatives


2 current practices history and overview ii
2. Current practices: history and overview - II targeting

  • Development - NT forecasting

    • NT forecasting - “expert approaches” at first

    • NT forecasting - more data-based approaches

      • single-equation

      • some simultaneous systems

    • policy horizon (4-6Q) covered

    • no active MP

    • detailed sectoral forecasts


2 current practices history and overview iii
2. Current practices: history and overview - III targeting

  • Development - MT forecasting

    • striving for “the best model” for a couple of yrs

    • introduction of simple gap model (2000/2001)

      • calibrated

      • forward looking

      • active MP

    • policy experiments possible and appreciated by the board

    • lot of work on internal forecasting process


2 current practices history and overview iv
2. Current practices: history and overview - IV targeting

  • Current state:

    • one forecast - combines advantages of both approaches

    • intra-departmental forecasting team

    • board meets monthly

    • Q projection exercise + “dark times” w/o forecast

    • “situation reports” (30-60p.) monthly + “inflation reports” quarterly


2 current practices v
2. Current practices - V targeting

  • Monetary Policy

  • 2 policy analysis experts

  • ** organisation, documentation

Head of the Department

  • External developments

  • ext. Assumptions (CF)

  • ER - order flows

Forecasting Team

  • Real Economy

  • GDP specialist

  • Inflation specialist

  • ** NT forecast

  • Economic Modelling

  • Model operator

  • Model Database

  • ** MT forecast

  • Monetary Analysis

  • fiscal sector specialist


2. Current practices - VI targeting

  • Forecasting team

    • 10-15 economists

    • all divisions represented (head + 1-2 economists)

    • experts may get invited to topics

    • open entry: department, advisors, board members

    • head of team: head of department + co-ordinator


3 elements of the process i

Post morterm targeting

Equilibria and initial conditions - with BB

Fcasting techniques

GDP data

Inflation data

1st round of NTF

Alternatives with BB

WEEKS

1

2

3

4

5

0

BB meeting on Monetary Policy

Equilibria and initial conditions

1st Issues meeting

2nd Issues meeting

Fcast rounds

3. Elements of the Process - I


3 elements of the process ii
3. Elements of the Process - II targeting

  • Meetings on Forecasting Techniques

    • properties of main forecasting tools are re-introduced

    • opportunity to introduce changes and their significance

    • refreshes staff's and FT's familiarity with the techniques and their pitfalls


3 elements of the process iii
3. Elements of the Process - III targeting

  • Issue Meetings

    • collective and intuitive view among the staff where the economy is and what are the current economic issues

    • designed to address a wide range of questions

      • recent data out-turns

      • analytically sophisticated issues

    • broad participation of staff encouraged


3 elements of the process iv
3. Elements of the Process - IV targeting

  • Meeting on Near Term Forecast

    • is more about where the economy is and what the current shocks are

    • essential input for Medium Term (model) Forecast

    • integral part of the overall message


3. Elements of the Process - V targeting

  • Meeting on Equilibrium and Initial conditions

    • gap model

    • have the equilibrium trends changed (not often) ?

    • where are we now ? - Kalman filtering + expert knowledge

    • + external assumptions (Consensus forecast)

    • exchange rate - mix of model consistent UIP and order flow forecasts (BoP)


3 elements of the process vi
3. Elements of the Process - VI targeting

  • Forecast Rounds of Medium Term Forecast

    • is more about where the economy is going to go beyond the NTF

    • make the core model behaviour consistent with the views of experts and other model tools

      • work incrementally to alter the baseline scenario

      • if consensus emerges, prepare alternatives

    • use the model mechanisms to interpret the forecast


3 elements of the process vii
3. Elements of the Process - VII targeting

  • Meetings with the BB

    • staff's forecast but active involvement necessary

    • build credibility, feeling of openness

    • two meetings prior to official BB meeting:

      • equilibrium and initial conditions (+ formal approval of external assumptions)

      • alternatives - which risks it is worth to elaborate


3 elements of the process viii
3. Elements of the Process - VIII targeting

  • Post Morterm Meeting

    • opportunity to systematically asses what went to wrong and what should be strengthened

    • broad participation encouraged

    • effective tool to transform fresh emotions into effective measures for the next time


3 elements of the process documentation
3. Elements of the Process - targetingDocumentation


4 summary and challenges i
4. Summary and challenges -I targeting

  • Shift from data collection to information extraction

  • More structured debate about risks and policy issues + common language

  • “what if…?” questions can be answered

  • Forecast with active monetary policy (includes rates trajectory consistent w/ fcast)


4 summary and challenges ii
4. Summary and challenges - II targeting

  • no pure model forecast => consistency check role is partially an illusion

  • more dis-aggregated discussion within the same framework may be difficult => new model?

  • writing reports vs. doing analysis - situation vs. inflation report

  • decision making system in between Q projection rounds (RBNZ scatter plot ?)

  • interaction with the bank board


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