Miroslav Gavura

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Forecasting and Policy Analysis System in the NBS

• Miroslav Gavura

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Structure of the presentation

• Motivation Stylized facts
• Organizational framework of FPAS
• Key Features of macroeconomic model
• Future challenges - projects

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Motivation 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

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Motivation Stylized facts
MP3 Inflation target
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Motivation Stylized facts

• Inflation 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)

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FPAS - 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

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FPAS 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)

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FPAS 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

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FPAS 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

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FPAS organization 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)

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FPAS organization of forecasting process

• 3 chronologically subsequent sub-processes
• Initial assumptions of forecast (exogenous
  environment)
• Current position of economy and short-term
  forecast (3 quarters ahead)
• Medium-term forecast until 2008 and risk analysis

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FPAS organization of forecasting process

• Meetings
• Issue meeting
• Initial assumptions
• Short-term forecast (3Q ahead), equilibrium
  trends and current state of economy
• Presentation of NTF to the Bank Board
• Preparing medium-term forecast (iterative
  process)
• Finalization of the medium-term forecast and
  alternative scenarios
• Presentation of the Medium-term forecast
• Post Mortem meeting

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FPAS 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

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FPAS key features of QPM (2)

• 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)

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FPAS key features of QPM (3)
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FPAS role 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

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Future 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

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• THANK YOU FOR ATTENTION

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Motivation 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)