Prediction Bias and Undershooting of the Inflation Target

Juraj Antal, Michal Hlaváček and Roman Horvath

Chapter 5 in Evaluation of the Fulfilment of the CNB's Inflation Targets 1998-2007, 2008, pp 57-76 from Czech National Bank, Research and Statistics Department

Abstract: This paper is primarily concerned with assessing the bias of the CNB's predictions in relation to undershooting of the inflation target. We conclude, that the inflation prediction error has decreased over time. We further point out that the GDP growth respectively interest rates were above respectively below the forecast most of the time, even in the situation of systematic undershooting of the target. Thus, undershooting then cannot be explained with the help of standard demand mechanisms and positive supply impulses were admittedly underestimated in the past. According to our findings, about half of the apparent amount of target undershooting in 2003 was to be attributed to errors in exogenous factor (foreign interest rates, GDP and inflation) predictions. As follows from the distribution of inflation prediction errors across separate price segments, overpredictions of inflation during a prevailing portion of the period under review were to be attributed to mistakes in prediction of food prices and core CPI ex food, while prediction errors in energy prices mostly rather helped to approach the target. Prediction errors in regulated prices were acting in both directions.

Keywords: macroeconomics; monetary policy; inflation targeting; forecasting (search for similar items in EconPapers)
JEL-codes: E37 E52 E58 (search for similar items in EconPapers)
Date: 2008
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