Central Bank Forecasts of Policy Interest Rates - Konjunkturinstitutet

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14Both Norges Bank and the Riksbank do reasonably well relative to a naïve forecast. Norges Bankoutperforms it at all horizons, as does the Riksbank at the three-month and one-year horizons.That is, central banks add information above and beyond a naïve forecast at reasonably long horizons,calling into question Goodhart and Lim’s (2011) suggestion that central banks should adopt amore mechanical approach – such as a no-change or implied forward market rate assumption – athorizons beyond two quarters. 9Goodhart and Lim’s (2011) recommendation can also be questioned on other grounds. Both a constantpolicy interest rate over the forecast horizon and implied forward market rates have been usedand later abandoned by several central banks (including Norges Bank and Sveriges Riksbank);drawbacks included difficulties in generating and interpreting the forecasts and indeterminacy inforecasting scenarios. 10 There is also intuitive theoretical appeal in the idea that communicating theoutlook aids private agents’ decision making about consumption and investment – thereby improvingthe implementation of monetary policy. Publishing endogenous interest-rate forecasts is also inline with the conclusions of Faust and Leeper (2005) and Faust and Wright (2008) that unconditionalforecasts of the policy interest rate (and goal variables) provide a more effective means ofcommunication than conditional forecasts.4. ConclusionsThe results in this paper reveal only modest differences in forecast precision between central banks’policy-rate projections and market-implied rate expectations. From a policy point of view, this isinteresting for a number of reasons. First, it is probably comforting for proponents of endogenousinterest-rate path publications that the central bank’s forecast precision is roughly on par with themarket’s and generally superior to a naïve forecast. From that benchmark, concerns that publicationof central-bank projections may prompt a deterioration in other agents’ forecasts seems unwarranted.11 Second, the relatively even forecast performance – combined with the fact that the centralbanks do fairly well compared to a naïve forecast – does not lend support for Goodhart and Lim’s(2011) recommendation that central banks should abandon their own forecasts in favour of marketimpliedexpectations or no-change forecasts. Third, when divergences do arise between the centralbank and the market-implied forecasts, the results in this paper do not give strong priors about howthe divergence will be resolved. After all, market-implied expectations have, over these samples,been as fair a guide to future developments as central-bank forecasts.9 Specifically, Goodhart and Lim (2011) evalutate short-term interest rate forecasts in New Zealand and the UnitedKingdom where the former are the forecasts of the Reserve Bank of New Zealand and the latter have been derived frommoney market yield curves. They conclude (p. 135) that the forecasts ”… have been excellent for the immediateforthcoming quarter, reasonable for the next quarter, and useless thereafter”.10 See, for example, Ólafsson (2007) for a discussion.11 Dale et al. (2011) suggest that a central bank which publishes forecasts of poor quality risks causing the privatesector’s forecast precision to deteriorate.
15However, both central-bank projections and expectations inferred from market pricing fail tests forbias and inefficiency at longer forecast horizons. This may reflect difficulties in forecasting during aturbulent period or more fundamentally, incomplete knowledge of the structure and dynamics ofthe economy. The results nevertheless indicate that forecasts do not live up to the demandingstandards of fully rational expectations.
Page 1: Working PaperNo. 128. Januari 2013C
Page 4 and 5: NIER prepares analyses and forecast
Page 6 and 7: Summary in SwedishPå senare år ha
Page 9 and 10: 71. IntroductionCentral bank transp
Page 11 and 12: 9Figure 1. Policy interest rates in
Page 13 and 14: 11Table 1. RMSEs and results from t
Page 15: 13wheree are the forecast errors of
Page 19 and 20: 17Rudebusch, G. D. (2008), “Publi
Page 21 and 22: 19Figure A3. Forecast errors at the
Page 23 and 24: 21Figure A7. Forecast errors at the
Page 25 and 26: 20 Gorton, Gary andRichard RosenCor
Page 27 and 28: 54 Östblom, Göran Emissions to th
Page 29 and 30: 90 Henrik Braconier, A New Method f
Page 31 and 32: 124 Patrik Baard, HenrikCarlsen, Ka

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