Forecasting for monetary policy

TL;DR

Forecasting for monetary policy addresses three Bernanke (2024) themes: inherent forecasting challenges, the conditional nature of policy paths, and the importance of forecast evaluation. The paper synthesizes these ideas and provides a formal evaluation of the Bank of England's inflation forecasts, using rationality and predictive-accuracy tests and sub-sample analysis to assess performance relative to benchmarks and survey forecasts. It finds BoE forecasts generally outperformed simple benchmarks and were competitive with surveys, even amid large 2022 shocks, highlighting the value of forecast combinations, expert judgment, and robust evaluation. The work offers practical guidance for central banks on how to communicate uncertainty, balance model-based and judgment-based inputs, and structure forecast evaluation to improve inflation risk management.

Abstract

This paper discusses three key themes in forecasting for monetary policy highlighted in the Bernanke (2024) review: the challenges in economic forecasting, the conditional nature of central bank forecasts, and the importance of forecast evaluation. In addition, a formal evaluation of the Bank of England's inflation forecasts indicates that, despite the large forecast errors in recent years, they were still accurate relative to common benchmarks.

Figures (5)

• Figure 1: Bank Rate and Market Expectations
• Figure 2: UK CPI inflation forecasts
• Figure 3: Forecast errors
• Figure 4: Forecast evaluation
• Figure 5: Comparison with Survey Forecasts