Forecast accuracy and efficiency at the Bank of England – and how forecast errors can be leveraged to do better

Derrick Kanngiesser and Tim Willems

This post describes a systematic way for central banks to employ past forecasts (and associated errors) with the aim of learning more about the structure and functioning of the economy, ultimately to enable a better setting of monetary policy going forward. Results suggest that the Monetary Policy Committee’s (MPC’s) inflation forecast has tended to underestimate pass-through from wage growth to inflation, while also underestimating the longer-term disinflationary impact of higher unemployment. Regarding the effects of monetary policy, our findings suggest that transmission through inflation expectations has played a bigger role than attributed to it in the forecast.

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Forecasting GDP in the presence of breaks: when is the past a good guide to the future?

George Kapetanios, Simon Price and Sophie Stone.

Structural breaks are a major source of forecast errors, and few come larger than the recent financial crisis and subsequent recession. After a break, formerly good models stop working. One way to cope is to discount the past in a data driven way. We try that, and find that shortly after the crash it was best to ignore almost all data older than three years – but now it is again time to take a longer view.
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