How to Improve Inflation Forecasting in Canada
23 Pages Posted: 17 Oct 2019
Date Written: September 2019
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: Suggested Citation