banca naŢionalĂ a romÂniei. outline: the forecasting process the model further developments

BANCA NABANCA NAŢŢIONALIONALĂ AĂ A ROM ROMÂÂNIEINIEIBANCA NABANCA NAŢŢIONALIONALĂ AĂ A ROM ROMÂÂNIEINIEIBANBANCCA NAA NAŢŢIONALIONALĂĂ A ROM A ROMÂÂNINIEIEIBANBANCCA NAA NAŢŢIONALIONALĂĂ A ROM A ROMÂÂNINIEIEI

BANCA NABANCA NAŢŢIONALIONALĂ AĂ A ROM ROMÂÂNIEINIEIBANCA NABANCA NAŢŢIONALIONALĂ AĂ A ROM ROMÂÂNIEINIEI

Outline:

• The forecasting process

• The model

• Further developments


The forecasting process

Stages:

• Near term forecasts of key variables

• Assessment of current position of the economy over the business cycle

• Medium-term projections using the MAMTF (Model for Analysis and Medium-Term Forecasting)


Flow of information in the forecasting process at the National Bank of Romania

Near-term models and expert forecastNTF Inflation, GDP, ex. rate

etc.

Assessment of initial conditions and medium-term trends

Exogenous variables forecasts

Trends & Gaps

Medium-term(core)model

Expert judgment

Finalmedium-term forecast and risk scenarios

Anticipated shocks, fiscal impulse, etc.

Near-term forecast

Tunes

Uncertainty


Quarterly Forecasting & Decisions Schedule

Time Event Details

T-45 Task Force meeting Model meeting (recalibration and other developments) - biannually

T-35 Task Force meeting Near-Term Forecasts – NTF (inflation, GDP, interest rates, exchange rate) and exogenous scenarios

T-28 Task Force meeting Initial conditions (GDP, interest rates, exchange rate gaps), medium run equilibrium conditions and exogenous variables

T-22 MPC meeting Initial conditions, equilibrium conditions, exogenous variables

T-16 Task Force meeting Final projection meeting

T-10 MPC meeting Forecasts and risk scenarios

T Inflation Report Forecasts and ‘Inflation Report’ sent to MPC

T+1 MPC meeting Discussion of ‘Inflation Report’

T+7 Bank Board meeting Discussion of ‘Inflation Report’ and monetary policy decision

Task Force set up to implement IT framework consists of experts from Monetary Policy and Macroeconomic Modelling Department and Research and Publications Department



Characteristics

• Based on formalized models and expert judgment

• Two types of modeling approaches

– Estimation approach at the short-run horizon

– Calibration approach at the medium-term horizon

• Final forecast integrates information from short-term models, medium-term model and expert judgment



• Role of near-term forecasting– Cover short end of forecast horizon– Input for the initial conditions of the forecast

• Role of expert judgment– Flexibility of the NBR medium-run forecasting model allows

direct incorporation of expert input– Forecasts of effects of anticipated exogenous events (e.g.

change in excise duties)– Forecasts of variables not explicitly modeled (e.g. fiscal impulse) – Model forecasts can be “tuned” if unrealistic, using idiosyncratic

judgments for each projection round



• Role of medium-term model– Shapes the initial conditions of the forecast rounds– Integrates all information in a consistent way– Generates an interest rate path which can serve as policy

guideline, together with projections for all relevant macroeconomic variables

– Can be used to implement risk scenarios


Near-Term Forecasting

• Two-quarter horizon forecasts for key variables

• ARMAX model for core inflation and ECM for GDP components; expert judgment incorporated

• Economic theory as a basis of analysis, but emphasis on forecasting accuracy

• Used for analysis and for establishing the initial conditions for the QPM


Medium-Term Forecasting Framework

1. History of the Model

• Work on the NBR’s model (MAMTF) started in mid-2004

• Significant progress achieved, with technical assistance support from several IMF missions and bilateral exchanges/expert visits with the Czech National Bank (MAMTF conceived in similar fashion to the CNB’s QPM)


2. General characteristics of MAMTF

• Small semi-structural calibrated model with a New-Keynesian core (ST and MT non-neutrality)

• Consistent with achieving multi-period inflation targets

• Economy assumed to converge to well-defined and stable long-run equilibrium

• Deviations from trends reflect cyclical behavior of the economy, paramount for this type of model

• Model open to continuous improvement, while maintaining the core structure; in the near future, expected to be gradually replaced by a dynamic general equilibrium model



2. General characteristics of MAMTF

• Use of satellite models for:

- GDP components forecasting; the forecasts for other relevant

variables (inflation, exchange rate, economic growth and so on) are

exogenously imposed from the output of the MAMTF

- fiscal impulse decompositions into cyclical and structural

components



Deposit interest rates

Lending interest rates

Foreign interest rate

Fiscal and income policies

Balassa-Samuelson effect CORE2 inflation

Import prices

Administered and volatile

prices

CPI inflation

Exchange rate pass-through

Net exports channel

Wealth and balance sheet

effect

Expectations

Consumption/saving decisions

Consumption and

investment borrowing

Excess demand

Exchange rate (UIP)

NBR’s monetary policy rate

3. Transmission mechanism


3. Transmission mechanism

Interest rate channel

- relatively slow impact and limited efficiency

- monetary policy decisions transmitted through commercial banks’

deposit and lending interest rates

Exchange rate channel

- relatively quick through direct impact on import prices (including fuel

prices and excise tax); indirect impact on aggregate demand through net export

channel

Expectations channel

- quite significant; reflects second round effects of inflationary shocks

Wealth and balance sheet channel

- important due to high share of foreign currency loans


• Inflation components

– Core inflation determined by its structural persistence, inflation expectations, output gap, import price inflation and Balassa-Samuelson effect

– Administered price inflation given by an exogenous scenario (discussions with the regulatory institutions on energy and natural gas prices)

– Fuel price inflation determined by its structural persistence, international oil price, exchange rate and inflation expectations

– Volatile prices inflation given by an exogenous scenario (seasonally pattern, exchange rate)

4. Model structure


• Output gap determined by its own persistence, real deposit and lending interest rates gaps, real exchange rate gap and a proxy for the wealth and balance sheet effect induced by the dynamics of the exchange rate

• Exchange rate determined according to uncovered interest parity relationship including a risk premium; mixed backward and forward looking exchange rate expectations

• Monetary policy behavior described by a forward-looking policy interest rate rule that penalizes future deviations of inflation from the target, the output gap and excessive interest rate volatility

• Inflation expectations modeled as hybrids of backward-looking (inertial) and forward-looking (“model-consistent”) expectations

4. Model structure


Further developments

• Implementing a DSGE model:– Advantages over the current model:

• Fully structural• Non linear • Non-stationary steady state

– Theoretical structure derived – specific features included:

• Exchange rate appreciation in steady state• Trends in relative prices across different sectors• Administered prices are included as a component of the CPI

index


Further developments

• Draft evaluation of the model including:– Calibration– Filtering – Forecasting

• Short term objective: work with the current structure and provide shadow forecasts

• Medium term objective: further development of the model, including:

– Liquidity constrained agents

– Greater role for fiscal policy

– Adding a financial sector block


Thank you for your attention!

banca naŢionalĂ a romÂniei. outline: the forecasting process the model further developments

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