BNB, April 23, 2008
NÁRODNÁ BANKA SLOVENSKA
Miroslav Gavura
Forecasting and Policy Analysis Forecasting and Policy Analysis System in the NBSSystem in the NBS
2008 April 232008 April 23 BNB: BNB: Forecasting models and procedures of EU central banksForecasting models and procedures of EU central banks
Structure of the presentationStructure of the presentation
Motivation – Stylized facts
Organizational framework of FPAS
Key Features of macroeconomic model
Future challenges - projects
2008 April 232008 April 23 BNB: BNB: Forecasting models and procedures of EU central banksForecasting models and procedures of EU central banks
Motivation – Stylized factsMotivation – Stylized facts 3 periods of monetary-policy strategy in the NBS
1993-1998: Fixed exchange rate regime Price stability through fixed exchange rate (band) M2 – intermediate target
1999-2004: Orientation to qualitative conduct of monetary policy (MP)
Implicit inflation targeting Managed floating
2005 - current: Explicit inflation targeting Inflation targeting in conditions of ERM II
2008 April 232008 April 23 BNB: BNB: Forecasting models and procedures of EU central banksForecasting models and procedures of EU central banks
Motivation – Stylized factsMotivation – Stylized facts
1.5
2.0
2.5
3.0
3.5
4.0
4.5
dec05 dec06 dec07 dec08
%
MP3: Inflation target
2008 April 232008 April 23 BNB: BNB: Forecasting models and procedures of EU central banksForecasting models and procedures of EU central banks
Motivation – Stylized factsMotivation – Stylized factsInflation Targeting
Focus of MP on price stability – time lag between action and reaction of MP is longer than 1 year – Medium-term horizon
Role of inflation expectation – important transmission channel
Requirement of new forecasting and policy analysis system (FPAS)
2008 April 232008 April 23 BNB: BNB: Forecasting models and procedures of EU central banksForecasting models and procedures of EU central banks
FPASFPAS - Required changes - Required changes
New organizational structure of forecasting process Formalization of forecasting process Formalization of forecasting team
Development of new analytical tool – Quarterly projection model (QPM)
Communication strategy Medium-term forecast – main communication document Focus on inflation forecast linked to inflation target Risk analysis
2008 April 232008 April 23 BNB: BNB: Forecasting models and procedures of EU central banksForecasting models and procedures of EU central banks
FPASFPAS – Implementation (2 years) – Implementation (2 years)
May 2003 - Technical assistance of the IMF Two short visits of experts from the Czech National Bank Focused on technical cooperation in model building (QPM) and efficient
managing of the new forecasting process implementation
Autumn 2003 - Presentation of the model for discussion in the bank (structure and properties)
Spring 2004 – internal forecasts using the model in Monetary policy department (for economists)
July 2004 – presentation for the Bank Board Structure and properties of the model New forecasting process Example of report (Medium-term forecast)
2008 April 232008 April 23 BNB: BNB: Forecasting models and procedures of EU central banksForecasting models and procedures of EU central banks
FPASFPAS – Implementation – Implementation
2nd half of 2004 – Testing phase Two internal forecasting processes Presented in the Board – not published
December 2004 – Inflation targeting officially announced
April 2005 – First publication of the Medium-term forecast
Presentation of the model and forecasting process for professional economists
June 2005 – Conference on econometric modelling
2008 April 232008 April 23 BNB: BNB: Forecasting models and procedures of EU central banksForecasting models and procedures of EU central banks
FPAS – FPAS – “Medium-term forecast”“Medium-term forecast”Key document for monetary-policy decisions and
communication to public
Prepared on quarterly base
Publication version (www.nbs.sk): Analysis of current economic development Estimation of current state of economy (cyclical part of economy) Medium-term forecast of economy until 2008, focus on inflation forecast Evaluation of risk analysis –inflation forecast in a form of Fan chart (8
quarters ahead)
Internal version - provides detailed information of forecast Recommendation on interest rate trajectory Detailed description of alternative scenarios
2008 April 232008 April 23 BNB: BNB: Forecasting models and procedures of EU central banksForecasting models and procedures of EU central banks
FPAS – FPAS – organization of forecasting processorganization of forecasting process Forecasting team
Head of forecasting team (member of the Board) Coordinator of forecasting team Forecasting team (12 experts)
Forecasting process 6 weeks 6 regular working meetings + 2 meetings with the
Board Documentation
Reports Archiving (common network disc – free access to
documents)
2008 April 232008 April 23 BNB: BNB: Forecasting models and procedures of EU central banksForecasting models and procedures of EU central banks
FPAS – FPAS – organization of forecasting processorganization of forecasting process
3 chronologically subsequent sub-processes
1) Initial assumptions of forecast (exogenous environment)
2) Current position of economy and short-term forecast (3 quarters ahead)
3) Medium-term forecast until 2008 and risk analysis
2008 April 232008 April 23 BNB: BNB: Forecasting models and procedures of EU central banksForecasting models and procedures of EU central banks
FPAS – FPAS – organization of forecasting processorganization of forecasting processMeetings
1) Issue meeting
2) Initial assumptions
3) Short-term forecast (3Q ahead), equilibrium trends and current state of economy
4) Presentation of NTF to the Bank Board
5) Preparing medium-term forecast (iterative process)
6) Finalization of the medium-term forecast and alternative scenarios
7) Presentation of the Medium-term forecast
8) Post Mortem meeting
2008 April 232008 April 23 BNB: BNB: Forecasting models and procedures of EU central banksForecasting models and procedures of EU central banks
FPAS – FPAS – key features of QPM (1)key features of QPM (1) Gap model - modelling cyclical part of economy Description of transmission mechanism for small
open economy Exogenous supply side – assumption of real
convergence Systematic control of inflation through active
monetary policy – modified Taylor rule Endogenous exchange rate Forward-looking components
Economic agents – inflation, exchange rate Central bank – reaction function
2008 April 232008 April 23 BNB: BNB: Forecasting models and procedures of EU central banksForecasting models and procedures of EU central banks
FPAS – FPAS – key features of QPM (key features of QPM (22))
Two separate blocks
Block of cyclical part of economy (QPM model)
describes transmission mechanism, impact of MP on economy and prices
Block of long-run equilibrium trends Estimation of unobserved trend and cyclical
variables form measured economic indicators on history using Multivariate Filter with Unobserved Components (MVF-UC)
2008 April 232008 April 23 BNB: BNB: Forecasting models and procedures of EU central banksForecasting models and procedures of EU central banks
FPAS – FPAS – key features of QPM (key features of QPM (33))
Outputgap
RMCI
Foreigninflation
Nominal exchangerate
ForeignInterest rate
DomesticInterest rate
InflationExpectations
ForeignOutput gap
Importedprices
Inflation
Inflationtarget
2008 April 232008 April 23 BNB: BNB: Forecasting models and procedures of EU central banksForecasting models and procedures of EU central banks
FPAS – FPAS – role of model in forecasting processrole of model in forecasting process Systematic control of inflation through active
monetary policy – modified Taylor rule Model provides information what is necessary to do in
order for future to correspond with target
Analytical tool useful both for purposes of projection and alternative scenarios Different development of exogenous variables Different intensity of economic mechanisms (e.g. effect
of exchange rate)
Possibility to evaluate main risk factors related to target
2008 April 232008 April 23 BNB: BNB: Forecasting models and procedures of EU central banksForecasting models and procedures of EU central banks
Future challenges - Entry to EurozoneFuture challenges - Entry to Eurozone
FPAS Effort to increase compatibility with BMPE
BMPE versus internal forecasting exercise Co-operation with ECB, CBs
Modelling MCM type model (AWM synthesis) DSGE
2008 April 232008 April 23 BNB: BNB: Forecasting models and procedures of EU central banksForecasting models and procedures of EU central banks
2€ 1€
50, 20, 10 c 5, 2, 1 c
THANK YOU FOR ATTENTION
2008 April 232008 April 23 BNB: BNB: Forecasting models and procedures of EU central banksForecasting models and procedures of EU central banks
Motivation – Stylized factsMotivation – Stylized facts Monetary policy 1993 - 2004
Monetary programme – main document to the public Once a year – at the end of previous year for the
current year focus on short-term horizon – forecast for one year
ahead
No complex econometric model Forecast mostly based on judgmental approach Simple regression methods (single equation models)