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)