Forecasting inflation with an uncertain output gap

The output gap (measuring the deviation of output from its potential) is a crucial concept in the monetary policy framework, indicating demand pressure that generates inflation. The output gap is also an important variable in itself, as a measure of economic fluctuations. However, its definition and estimation raise a number of theoretical and empirical questions. This paper evaluates a series of univariate and multivariate methods for extracting the output gap, and compares their value added in predicting inflation. The multivariate measures of the output gap have by far the best predictive power. This is in particular interesting, as they use information from data that are not revised in real time. We therefore compare the predictive power of alternative indicators that are less revised in real time, such as the unemployment rate and other business cycle indicators. Some of the alternative indicators do as well, or better, than the multivariate output gaps in predicting inflation. As uncertainties are particularly pronounced at the end of the calculation periods, assessment of pressures in the economy based on the uncertain output gap could benefit from being supplemented with alternative indicators that are less revised in real time.Output gap, real time indicators, forecasting, Phillips curve

Real-time Data for Norway: Challenges for Monetary Policy

National accounts data are always revised. Not only recent data, but also figures dating many years back can be revised substantially. This means that there is a danger that an important part of the central bank's information set is flawed for a long period of time. In this paper we present a data base consisting of various vintages of real-time data from 1993Q1 to 2003Q4. We describe the nature of the data revisions, the causes of the revisions, and investigate whether the revisions are true martingale differences, or whether they can be forecasted. In the spirit of Orphanides and van Norden (2002), we analyze how data revisions and model uncertainty affect the reliability of output gap estimates. We also compare Taylor type interest rate rules based on real-time data versus final data and assess the consequences for monetary policy if policy was conducted using this type of interest rate rules. Finally, we analyze the implications of output gap uncertainty for monetary policy using a small New Keynesian macroeconomic model. --Monetary policy,output gap,real-time data,interest rate rules

Evaluation of Norges Bank´s Projections

This article analyses Norges Bank’s projections for 1998, published in autumn 1996 and autumn 1997 respectively. Compared with earlier articles on this subject, we go one step further in the analysis by examining projections with a two-year horizon. It is also important to be able to analyse economic developments further ahead because decisions on economic policy will influence the economy more than one year ahead. The evaluation focuses on the contributions from erroneous assumptions concerning exogenous variables, such as public demand and externally generated inflation. A comparison with two-year projections from Statistics Norway is also included. All in all, our forecast errors for 1998, presented in autumn 1997, were smaller than the forecast errors for earlier years. There is no clear evidence that the projections would have been substantially better if we had known actual movements in exogenous variables in advance. The forecast errors increase for some variables and are reduced for others. In principle, one would expect the forecast errors in the projections presented at the end of 1996 to be greater than the errors in the projections presented at the end of 1997. This is confirmed for important real variables such as mainland demand and employment. For wage and price inflation, however, the forecast errors are smallest in the earliest projections. The projections for 1998 show a larger forecast error in the projection for consumer price inflation than in earlier years as a result of lower-than-expected imported price inflation. Towards the end of 1998 it was evident that consumer price inflation was lower than implied by exchange rate movements. In the consumer price equation, we have since 1999 used an expanded import-weighted exchange rate index, which includes the currencies of several countries in Asia. The actual forecast error is largely due to the fact that the effects of the crisis in Asia were erroneously evaluated in two ways. First, the crisis had a surprisingly strong effect on international prices. Second, the depreciation of Asian currencies contributed to a stronger effective krone exchange rate than implied by traditional exchange rate indices. Analyses of forecast errors are an important part of the work aimed at making the projections more accurate. At the same time, continuous efforts are made to improve the analyses, in the form of both short-term cyclical analyses and further development of the model. The analysis of forecast errors in the projections for 1998 confirms that there is a potential for improving the RIMINI model. Various types of shock, such as international financial turbulence and fluctuations in the oil price, will nevertheless continue to be a source of uncertainty in economic developments

Revisions of National Accounts

I investigate revisions of growth rates in nominal and real quarterly GDP for mainland Norway, as well as for the GDP deflator, from 2004 to 2016. Several measures from alternative revision periods are computed. Mean revisions of real GDP are small and close to zero, while nominal GDP and the deflator are under-predicted on average when they are first published. For all three variables, mean absolute revisions are quite substantial. Revisions can, in general, be explained by the arrival of new information, although revisions of the deflator in particular are also characterized as reducing noise

Evaluation of Norges Bank's projections

As a means to drawing up the most accurate projections possible for economic developments, Norges Bank regularly evaluates its model-based forecasts. Analyses of forecast errors may make an important contribution to improving projections. It is also desirable to compare Norges Bank's projections with those of other institutions. The strength of the cyclical upswing was clearly underestimated in the projections for the period 1994-1996. Projections for employment growth were particularly low, also for the 1997 projections albeit to a lesser extent. On the other hand, forecasts for price and wage inflation were fairly accurate. The forecast errors were to a large extent ascribable to erroneous assumptions about economic policy, particularly growth in public demand. Petroleum investment was also much higher than projected. If the model-based projections are corrected for these factors, they are very close to the outturn, particularly for price and wage inflation. Over the past year, Norges Bank took steps to improve the accuracy of the exogenous variables used in the projections. Among other things, the estimate for public spending growth is supplemented by Norges Bank’s own assessment of local government demand. Furthermore, data on oil-related activities are collected from a larger number of sources than earlier. Apreliminary analysis of forecast errors for 1998, based on figures from the national accounts figures published in February 1999, indicates that previous analyses of forecast errors may have improved the projections. Forecast errors seem to have been reduced in 1998 compared with the two previous years. A comparison with projections from Statistics Norway and the Ministry of Finance for the period between 1994 and 1998 indicates that the degree of forecast errors from the three institutions has been fairly similar. On average, however, projections from Statistics Norway and Norges Bank have been more accurate than forecasts from the Ministry of Finance. In this article, we focus on forecast errors stemming from erroneous estimates of economic policy and inaccurate projections for other exogenous variables. A more thorough analysis would also include a further disaggregation of errors stemming from the incorrect use of the model and those errors occurring due to model deficiencies. Such an analysis will be undertaken once the revision of the national accounts system that took place in the mid-1990s has been fully incorporated in the model data

Evaluation of Norges Bank’s Projections for 1999

In order to provide the central bank with an optimal basis for the conduct of monetary policy, the central bank must evaluate its projections for economic developments. Norges Bank has previously published analyses of its projections for 1996, 1997 and 1998. This article evaluates the Bank’s projections for 1999. The article starts with an analysis of the projections in the December 1997 Inflation Report. The baseline scenario in the report implied a cyclical turnaround in 2000, but the turnaround occurred as early as mid-1998 and was followed by slow growth in 1999. The analysis of main developments was broadly in line with actual developments, but events in 1998 led to an earlier-than-projected turnaround. The projections for 1999 were therefore not particularly accurate. However, the report also included alternative projections where important assumptions were changed, for example a substantial depreciation of the krone and a rise in interest rates. Developments in the latter half of 1998 and into 1999 were closely in line with this alternative. The projections for 1999 published in the December 1998 Inflation Report were closer to the mark. Norges Bank’s projections are compared with those of Statistics Norway and the Ministry of Finance. Norges Bank’s forecast for wage growth can be said to be at least as good as that of the two other institutions. There are no systematic differences with regard to the accuracy of price inflation projections

Evaluation of Norges Bank's Projections

As a means to drawing up the most accurate projections possible for economic developments, Norges Bank regularly evaluates its model-based forecasts. Analyses of forecast errors may make an important contribution to improving projections. It is also desirable to compare Norges Bank's projections with those of other institutions. The strength of the cyclical upswing was clearly underestimated in the projections for the period 1994-1996. Projections for employment growth were particularly low, also for the 1997 projections albeit to a lesser extent. On the other hand, forecasts for price and wage inflation were fairly accurate. The forecast errors were to a large extent ascribable to erroneous assumptions about economic policy, particularly growth in public demand. Petroleum investment was also much higher than projected. If the model-based projections are corrected for these factors, they are very close to the outturn, particularly for price and wage inflation. Over the past year, Norges Bank took steps to improve the accuracy of the exogenous variables used in the projections. Among other things, the estimate for public spending growth is supplemented by Norges Bank’s own assessment of local government demand. Furthermore, data on oil-related activities are collected from a larger number of sources than earlier. Apreliminary analysis of forecast errors for 1998, based on figures from the national accounts figures published in February 1999, indicates that previous analyses of forecast errors may have improved the projections. Forecast errors seem to have been reduced in 1998 compared with the two previous years. A comparison with projections from Statistics Norway and the Ministry of Finance for the period between 1994 and 1998 indicates that the degree of forecast errors from the three institutions has been fairly similar. On average, however, projections from Statistics Norway and Norges Bank have been more accurate than forecasts from the Ministry of Finance. In this article, we focus on forecast errors stemming from erroneous estimates of economic policy and inaccurate projections for other exogenous variables. A more thorough analysis would also include a further disaggregation of errors stemming from the incorrect use of the model and those errors occurring due to model deficiencies. Such an analysis will be undertaken once the revision of the national accounts system that took place in the mid-1990s has been fully incorporated in the model data

Evaluating Real-Time Forecasts from Norges Bank’s System for Averaging Models

We evaluate forecasts of GDP growth and inflation made by the system of averaging models (SAM) and compare their performance with Norges Bank's forecasts in the Monetary Policy Report. We assess the new version of SAM, as well as the ones that were actually used from 2008 until the end of 2010. We conclude that SAM forecasts perform quite well. In particular for inflation, the forecasting performance seems to have improved with the new version of SAM

Evaluation of Norges Bank's Projections

As a means to drawing up the most accurate projections possible for economic developments, Norges Bank regularly evaluates its model-based forecasts. Analyses of forecast errors may make an important contribution to improving projections. It is also desirable to compare Norges Bank's projections with those of other institutions. The strength of the cyclical upswing was clearly underestimated in the projections for the period 1994-1996. Projections for employment growth were particularly low, also for the 1997 projections albeit to a lesser extent. On the other hand, forecasts for price and wage inflation were fairly accurate. The forecast errors were to a large extent ascribable to erroneous assumptions about economic policy, particularly growth in public demand. Petroleum investment was also much higher than projected. If the model-based projections are corrected for these factors, they are very close to the outturn, particularly for price and wage inflation. Over the past year, Norges Bank took steps to improve the accuracy of the exogenous variables used in the projections. Among other things, the estimate for public spending growth is supplemented by Norges Bank’s own assessment of local government demand. Furthermore, data on oil-related activities are collected from a larger number of sources than earlier. Apreliminary analysis of forecast errors for 1998, based on figures from the national accounts figures published in February 1999, indicates that previous analyses of forecast errors may have improved the projections. Forecast errors seem to have been reduced in 1998 compared with the two previous years. A comparison with projections from Statistics Norway and the Ministry of Finance for the period between 1994 and 1998 indicates that the degree of forecast errors from the three institutions has been fairly similar. On average, however, projections from Statistics Norway and Norges Bank have been more accurate than forecasts from the Ministry of Finance. In this article, we focus on forecast errors stemming from erroneous estimates of economic policy and inaccurate projections for other exogenous variables. A more thorough analysis would also include a further disaggregation of errors stemming from the incorrect use of the model and those errors occurring due to model deficiencies. Such an analysis will be undertaken once the revision of the national accounts system that took place in the mid-1990s has been fully incorporated in the model data

Etterprøving av Norges Banks anslag

I denne artikkelen analyseres Norges Banks anslag for 1998, gitt henholdsvis høsten 1996 og høsten 1997. I forhold til tidligere artikler om dette temaet går vi et skritt videre i analysen ved å se på anslag med to års horisont. Det er viktig å kunne analysere den økonomiske utviklingen også lenger fram i tid, fordi beslutninger om økonomisk politikk vil påvirke økonomien på mer enn ett års sikt. Etterprøvingen fokuserer på bidragene fra feil forutsetninger om størrelser som ikke er modellbestemt (såkalte eksogene størrelser), for eksempel offentlig etterspørsel og importert prisstigning. Vi sammenlikner også med anslag fra Statistisk sentralbyrå gitt med to års horisont. Samlet sett var prognosefeilene for 1998, gitt høsten 1997, mindre enn prognosefeilene for tidligere år. Det er ingen klar tendens til at anslagene ville ha vært vesentlig bedre dersom vi på forhånd hadde kjent den faktiske utviklingen i de eksogene variablene. Prognosefeilene øker for en del variable og reduseres for andre. I utgangspunktet vil en vente at prognosefeilene i anslagene gitt i slutten av 1996 vil være større enn feilene i anslagene gitt i slutten av 1997. Dette bekreftes for viktige realstørrelser, som for eksempel etterspørselen fra Fastlands-Norge og sysselsettingen. For lønns- og prisveksten er imidlertid prognosefeilene minst i det tidligste anslaget. Anslagene for 1998 viser en større prognosefeil i anslaget for konsumprisveksten enn vi har sett i anslagene for tidligere år. Dette skyldes en lavere importert prisvekst enn forventet. Mot slutten av 1998 ble det klart at konsumprisveksten ble lavere enn det en kunne vente ut fra valutakursutviklingen. Fra 1999 har vi i konsumprislikningen brukt en utvidet importveid valutakursindeks, der blant annet valutaene til flere land i Asia er inkludert. Prognosefeilen som ble gjort, skyldes i stor grad at virkningene av krisen i Asia ble feilvurdert på to måter. For det første fikk krisen en overraskende sterk effekt på den internasjonale prisutviklingen. For det andre bidrog depresieringen av de asiatiske valutaene til en sterkere effektiv kronekurs enn det de tradisjonelle kursindeksene tilsa. Analyser av prognosefeil er viktige ledd i arbeidet for å gjøre anslagene mer treffsikre. Samtidig arbeides det kontinuerlig med å forbedre analysearbeidet, både i form av kortsiktige konjunkturanalyser og videreutvikling av modellapparatet. Analysen av prognosefeilene i anslagene for 1998 bekrefter at det er forbedringsmuligheter i RIMINI-modellen. Ulike typer «sjokk», som internasjonal finansiell uro og svingninger i oljeprisen, vil likevel fortsatt være kilder til overraskelser i den økonomiske utviklingen