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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

(jaromir.hurnik@cnb.cz)

Monetary policy division

Czech National Bank

outline
Outline

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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
  • 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
slide10

2. Current practices - VI

  • 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

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
  • 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
  • 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
  • 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
slide15

3. Elements of the Process - V

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