How to Improve Inflation Forecasting in Canada

23 Pages Posted: 17 Oct 2019

See all articles by Troy Matheson

Troy Matheson

Government of New Zealand - Department of Economics

Date Written: September 2019

Abstract

Against the backdrop of an ongoing review of the inflation-targeting framework, this paper examines the real-time inflation forecasts of the Bank of Canada with the aim of identifying potential areas for improvement. Not surprisingly, the results show that errors in forecasting non-core inflation (commodity prices etc.) are found to be the largest contributors to overall inflation forecast errors. Perhaps more importantly, relatively small core inflation forecast errors appear to mask large and offsetting errors related to the output gap and the policy interest rate, partly reflecting a tendency to overestimate the neutral nominal policy rate in real time. Faced with these uncertainties, the Governing Council's gradual approach to changing its policy settings appears to have served it well.

Keywords: Real interest rates, Financial crises, Inflation rates, Inflation expectations, Monetary policy, Inflation, inflation targeting, real-time data, forecast errors, WP, output gap, core inflation, bank of Canada, inflation expectation, forecast error

JEL Classification: C53, E31, E37, G21, E52, E01, Q02

Suggested Citation

Matheson, Troy, How to Improve Inflation Forecasting in Canada (September 2019). IMF Working Paper No. 19/190. Available at SSRN: https://ssrn.com/abstract=3471381

Troy Matheson (Contact Author)

Government of New Zealand - Department of Economics ( email )

2 The Terrace
P.O. Box 2498
Wellington
New Zealand

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