Autonomous Factor Forecast Quality: The Case of the Eurosystem

Abstract

The publication of liquidity forecasts can be understood as part of central banks' push toward greater transparency regarding monetary policy implementation. However, the advantages of transparency can only be realized if the information provided is accurate and reliable. This paper (1) provides an overview of the international practice of publishing the forecasts; (2) proposes and implements a framework to evaluate the accuracy and reliability of forecasts using the long history of Eurosystem forecasts as a case study; and (3) analyzes the Eurosystem forecast errors to determine the factors influencing forecast quality. A supporting factor for a high-quality forecast is the contemporaneousness of the information used, whereas money market segmentation can weigh on forecast quality.

Keywords: Bank rates, Market interest rates, Central bank operations, Central bank policy, Open market operations, central banking, operational frameworks, autonomous factors, forecasting, evaluation., WP, forecast error, maintenance period, excess reserve, Eurosystem, AFF

JEL Classification: E58, E47, E42, E52, G21, E01, O24, E5