p e Sc Annual Conf 2008 a2 Bg

Slide 1Near 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)
BANCA NAIONAL A ROMÂNIEI
Flow of information in the forecasting process at the National Bank of Romania
Near-term models
Assessment of initial conditions
Near-term forecast
Quarterly Forecasting & Decisions Schedule
Task Force set up to implement IT framework consists of experts from Monetary Policy and Macroeconomic Modelling Department and Research and Publications Department
Time
Event
Details
T-45
T-35
Near-Term Forecasts – NTF (inflation, GDP, interest rates, exchange rate) and exogenous scenarios
T-28
Initial conditions (GDP, interest rates, exchange rate gaps), medium run equilibrium conditions and exogenous variables
T-22
T-16
T+1
MPC meeting
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
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
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
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
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
- 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
Medium-Term Forecasting Framework
Expectations
Consumption/
- 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
Wealth and balance sheet channel
- important due to high share of foreign currency loans
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
Fully structural
Non linear
Trends in relative prices across different sectors
Administered prices are included as a component of the CPI index
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

p e Sc Annual Conf 2008 a2 Bg

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