The bias of the ECB inflation projections: A State-dependent analysis

Eleonora Granziera, Pirkka Jalasjoki and Maritta Paloviita

No 4/2024, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: We test for state-dependent bias in the European Central Bank's inflation projections. We show that the 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 nor 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.

Keywords: Inflation Forecasts; Forecast Evaluation; ECB; Central Bank Communication (search for similar items in EconPapers)
JEL-codes: C12 C22 C53 E31 E52 (search for similar items in EconPapers)
Date: 2024
New Economics Papers: this item is included in nep-ban, nep-cba, nep-eec, nep-mac and nep-mon
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:295738

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