The predictive power of ECB’s interval forecasts over point forecasts

ABSTRACT

This study examines interval forecasts released by the European Central Bank (ECB). To investigate whether these projections provide additional information over midpoint forecasts, we use a regression approach considering the interval nature of projections. The spread of a 3-month-ahead inflation forecast of the ECB has additional information for over midpoint forecasts while that of longer-term forecasts had no additional information. This indicates that the spread of a 3-month-ahead inflation forecast is a good indicator of uncertainty. Moreover, our finding suggests that the spread of a 3-month-ahead inflation forecast complements other measures of uncertainty that are often associated with declines in economic activity for longer term.

KEYWORDS:

• Range forecasts
• interval forecasts
• monetary policy
• central bank communication

JEL CLASSIFICATION:

• E37
• E52
• E58

Disclosure statement

No potential conflict of interest was reported by the author.

Notes

¹ Reifschneider and Tulip (2018) review the methodology used by the FOMC for constructing these benchmarks and evaluate their key properties.

² For example, the ECB releases its forecasts as follows: 1.5% as midpoint forecast and 1.0% to 2.0% as interval forecasts.

³ Hubert (2015) examines point forecasts of inflation by ECB, and shows that ECB inflation projections influence private inflation expectations.

⁴ See https://www.ecb.europa.eu/pub/projections/html/index.en.html for details. See ECB (2016) for details of the procedures and organization to produce forecasts.

⁵ See Blanco-Fernández, Corral, and González-Rodríguez (2011) for a detailed derivation and estimation of the interval data model.

⁶ This finding applies to all estimates below. Therefore, this fact will not be stated subsequently. Furthermore, all estimation results without the horizon dummy are robust to those with the dummy.

Additional information

Funding

This research was supported by a grant-in-aid from Zengin Foundation for Studies on Economics and Finance.