The bias and efficiency of the ECB inflation projections: A state dependent analysis

Arbeitspapier

We test for bias and efficiency of the ECB inflation forecasts using a confidential dataset of ECB macroeconomic quarterly projections. We investigate whether the properties of the forecasts depend on the level of inflation, by distinguishing whether the inflation observed by the ECB at the time of forecasting is above or below the target. The forecasts are unbiased and efficient on average, however there is evidence of state dependence. In particular, the ECB tends to overpredict (underpredict) inflation at intermediate forecast horizons when inflation is below (above) target. The magnitude of the bias is larger when inflation is above the target. These results hold even after accounting for errors in the external assumptions. We also find evidence of inefficiency, in the form of underreaction to news, but only when inflation is above the target. Our findings bear important implications for the ECB forecasting process and ultimately for its communication strategy.

Object Details

• ISBN: 978-82-8379-189-1
• Language: Englisch

References and Relationships

• Bibliographic citation: Series: Working Paper ; No. 1/2021

Classification and Topics

• Classification: Wirtschaft ; Hypothesis Testing: General ; Single Equation Models; Single Variables: Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes ; Forecasting Models; Simulation Methods ; Price Level; Inflation; Deflation ; Monetary Policy
• Subject: Forecast Evaluation ; Forecast Efficiency ; Inflation Forecasts ; Central Bank Communication

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Granziera, Eleonora ; Jalasjoki, Pirkka ; Paloviita, Maritta
• Event: Veröffentlichung
• (who): Norges Bank
• (where): Oslo
• (when): 2021

Further information

• Handle: http://hdl.handle.net/10419/246122
• Last update: 10.03.2025, 11:42 AM CET