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

Eleonora Granziera, Pirkka Jalasjoki and Maritta Paloviita

No 7/2021, Bank of Finland Research Discussion Papers from Bank of Finland

Abstract: 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.

Keywords: Forecast Evaluation; Forecast Efficiency; Inflation Forecasts; Central Bank Communication (search for similar items in EconPapers)
JEL-codes: C12 C22 C53 E31 E52 (search for similar items in EconPapers)
Date: 2021
New Economics Papers: this item is included in nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/240347/1/BoF-DP-2107.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:bofrdp:rdp2021_007

Access Statistics for this paper

More papers in Bank of Finland Research Discussion Papers from Bank of Finland Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().