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The Eurocoin project: new modelling ideas at central banks Lucrezia Reichlin Director General Research European Central Bank. CEPR 20 September 2007. Forecasting at central banks. Complex process involving: Structural and reduced form models

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The Eurocoin project: new modelling ideas at central banks Lucrezia Reichlin

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The eurocoin project new modelling ideas at central banks lucrezia reichlin

The Eurocoin project:

new modelling ideas at central banks

Lucrezia Reichlin

Director General Research

European Central Bank

CEPR

20 September 2007


The eurocoin project new modelling ideas at central banks lucrezia reichlin

Forecasting at central banks

Complex process involving:

  • Structural and reduced form models

  • Expert judgement based on processing of a lot of data

  • Partly story-telling, partly pure forecast

    (RCC framework agreement)


The eurocoin project new modelling ideas at central banks lucrezia reichlin

How important is expert judgement in forecasting?

Very, in the very short run

current quarter especially (``Where are we now?’’)

‘NOW-CASTING’


The eurocoin project new modelling ideas at central banks lucrezia reichlin

Institution do well in now-casting

Why?

Conjecture: this is because they exploit timely releases of monthly data within the month to forecast GDP which is available only later. In the Euro area, 6 weeks after the closing of the quarter

ECB models: use monthly information to forecast quarterly GDP growth rate

BRIDGING


The eurocoin project new modelling ideas at central banks lucrezia reichlin

Should we care about the short-run?

Yes!

It is the only thing we can really forecast


The eurocoin project new modelling ideas at central banks lucrezia reichlin

Some numbers

Relative Mean Square Forecast Error Performance

GDP growth: 1992 - 2001

Quarter

GB

SPF

0

0.87

0.85

1

1.03

1.03

2

1.16

1.00

3

1.23

1.06

4

1.29

1.06


The eurocoin project new modelling ideas at central banks lucrezia reichlin

Where does the Euro-coin project fit in?

  • Statistical model that mimics expert-judgement process in now-casting:

  • Based on lots of data: ``data-rich environment’’

  • Timely exploitation of early releases

  • .. and obtain a smooth signal in real time (sort of a moving average)


The eurocoin project new modelling ideas at central banks lucrezia reichlin

It has been a very innovative process

It has inspired an academic literature in forecasting

(many children, some even better than their parents?)

Models of this kind are now routinely used in central banks for estimating both GDP and inflation signals


The eurocoin project new modelling ideas at central banks lucrezia reichlin

Institutional successes

  • GDP – similar model (Giannone, Reichlin & Small, JME 2007)

  • Inflation – as in Eurocoin (see Cristadoro, Forni, Reichlin & Veronese, JMCB 2005)

  • ECB

  • Eurosystem of central banks

  • Federal Reserve, board of governors

  • Federal Reserve, New York

  • Swiss National Bank

  • Central Bank of New Zealand

  • GDP – several versions being evaluated

  • GDP – similar model (Giannone, Reichlin & Small, JME 2007)

  • Inflation – as in Eurocoin (see Cristadoro, Forni, Reichlin & Veronese, JMCB 2005)

  • Inflation – as in Eurocoin (see Cristadoro, Forni, Reichlin & Veronese, JMCB 2005)

  • Inflation – as in Eurocoin (see Cristadoro, Forni, Reichlin & Veronese, JMCB 2005)


The eurocoin project new modelling ideas at central banks lucrezia reichlin

How well does it work? ECB Forecast Comparison: 1998Q3–2005Q3


The eurocoin project new modelling ideas at central banks lucrezia reichlin

How does it work? The importance of timeliness and of a lot of data


The eurocoin project new modelling ideas at central banks lucrezia reichlin

Producing a smooth signal: a lead indicator for the moving average (New Zealand)


The eurocoin project new modelling ideas at central banks lucrezia reichlin

Conclusion

A great project

A good example of co-operation between academics and central bank economists …

Thanks to the CEPR!

(RCC framework agreement)


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