Academic journal article Global Economic Observer

The Accuracy Analysis of Inflation Rate Forecasts in Euro Area

Academic journal article Global Economic Observer

The Accuracy Analysis of Inflation Rate Forecasts in Euro Area

Article excerpt

(ProQuest: ... denotes formulae omitted.)

1. Introduction

The general public is very interested in macroeconomic predictions made for a future time, but the degree of interest decreases when the horizon became a period in the past. However, we should know the past performance of the forecasts in order to anticipate the quality of the next predictions.

The main aim of this study is to assess the accuracy of inflation rate forecasts for euro area by making a comparative analysis of predictions provided by two international providers: International Monetary Fund (IMF) and Organisation for Economic Co-operation and Development (OECD). Therefore, the U Theil's statistics are computed and the Diebold Mariano test is applied. Moreover, the directional accuracy was assessed, using only the predictions' signs, and the final values. The errors' magnitude has been neglected. In order to make the predictions robust to the presence of outliers, the high and the low errors received the same importance.

The paper is structured as it follows. After this brief introduction, a short literature review is provided. After the description of the methodology, the assessment and comparison of forecasts' accuracy are made for inflation rate predictions in euro area. The last section concludes.

2. The accuracy of forecasts provided by international institutions

Granger (1996) considered that the point predictions should be followed by forecast intervals based on the past performance of the point predictions. Many international institutions provided own predictions of the macroeconomic variables, among these being International Monetary Fund (IMF), Organisation for Economic Co-operation and Development (OECD), World Bank (WB), Survey of Professional Forecasters (SPF). Important studies regarding IMF and OECD predictions' accuracy are made by Artis (1996), Ash et al. (1998), McNees (1992), Mills and Pepper (1999), Abreu (2011), Allan (2012), Heilemann and Stekler (2013). Pons (2000) compared in terms of accuracy the OECD's predictions for 13 European countries and the national predictions of each country.

Heilemann and Stekler (2007) concluded that there is a low accuracy of G7's forecasts, the causes beingthe improper forecasting methods and non-realistic assumptions regarding the accuracy of the forecasts. Abreu (2011) evaluated various macroeconomic forecasts made by different institutions like: European Commission, Consensus Economics, OECD, IMF, and The Economist.

Allan (2012) proposed the combination technique as method for improving the OECD forecasts made for GDP in the G7 countries. The accuracy assessment of these predictions supposed the application of qualitative and quantitative techniques.

González Cabanillas and Terzi (2012) studied the forecasts accuracy of the predictions provided by European Commission before and during the recent economic crisis. They compared these forecasts with those provided by Consensus Economics, IMF and OECD. The Commission's forecasts errors have increased because of the low accuracy from 2009 for variables as GDP, inflation rate, govermnent budget balance, and investment.

Heilemann and Stekler (2013) analyzed the forecasts' accuracy for inflation and real GDP growth rate in case of the Germany predictions made by OECD and 3 professional forecasters from Germany. In the last 10 years, the accuracy forecasts for Germany's inflation and GDP did not improved too much.

Frenkel, Rülke and Zimmermann (2013) described the strategic behavior of the private forecasters that placed their expectations away from OECD's and IMF's ones, this duration of this event being 3 months.

Liu and Smith (2014) concluded that that Greenbook inflation forecasts are more accurate than those of the private forecasts, the authors making comparisons between the predictions provided by Survey of Professional Forecasters, Greenbook and other private forecasters.

Freedman (2014) analyzed the IMF forecasts' accuracy, concluding that there is a qualitative statistical analysis, but the researches were not too documented in some fields like: reference period, comparisons with previous studies, the review of changes, management response. …

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