Year: 2024
Type: article
Abstract: ABSTRACT We test for state‐dependent bias in the European Central Bank's inflation projections. We show that the Eurosystem/European Central Bank (ECB) tends to underpredict when the observed inflation rate at the time of forecasting is higher than an estimated threshold of 1.8%. The bias is most pronounced at intermediate forecasting horizons. This suggests that inflation is projected to revert towards the target too quickly. These results cannot be fully explained by the persistence embedded in the forecasting models or by errors in the exogenous assumptions on interest rates, exchange rates, or oil prices. The state‐dependent bias may be consistent with the aim of managing inflation expectations, as published forecasts play a central role in the ECB's monetary policy communication strategy.
Source: Journal of Forecasting
DOI: 10.1002/for.3236
Institutions: Norges Bank, Bank of Finland
Language: English
Domain: Social Sciences
Open Access status: bronze
Funder: De Nederlandsche Bank
OpenAlex ID: W4404600345