Interest rate assumptions and predictive accuracy of central bank forecasts

Malte Knüppel and Guido Schultefrankenfeld

Empirical Economics, 2017, vol. 53, issue 1, No 12, 195-215

Abstract: Abstract The interest rate assumptions for macroeconomic forecasts differ among central banks. Common approaches are given by the assumptions that interest rates remain constant over the forecast horizon, follow a path as expected by market participants or follow a path as expected by the central bank itself. Theoretical papers such as Svensson (The instrument-rate projection under inflation targeting: the Norwegian example. Centre for European Policy Studies Working Paper (127), 2006) and Galí (J Monet Econ 58:537–550, 2011) suggest an accuracy ranking for these forecasts, from employing central bank expectations yielding the highest forecast accuracy to conditioning on constant interest rates yielding the lowest. Yet, when investigating the predictive accuracy of the Bank of England’s and the Banco Central do Brasil’s forecasts for interest rates, inflation and output growth, we hardly find any significant differences between forecasts based on the different interest rate paths. Our results suggest that the choice of the interest rate assumption appears to be of minor relevance empirically.

Keywords: Forecast accuracy; Density forecasts; Projections (search for similar items in EconPapers)
JEL-codes: C12 C53 (search for similar items in EconPapers)
Date: 2017
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Related works:
Working Paper: The empirical (ir)relevance of the interest rate assumption for central bank forecasts (2013)
Working Paper: The Empirical (Ir)Relevance of the Interest Rate Assumption for Central Bank Forecasts (2013)
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DOI: 10.1007/s00181-016-1182-5

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