The Bias of the ECB Inflation Projections: a State-Dependent Analysis

36 Pages Posted: 18 Jun 2024

See all articles by Eleonora Granziera

Eleonora Granziera

Norges Bank

Pirkka Jalasjoki

Bank of Finland - Research

Maritta Paloviita

Bank of Finland - Research

Date Written: May 22, 2024

Abstract

We test for state-dependent bias in the European Central Bank’s inflation projections. We show that the ECB tends to underpredict when the observed inflation rate at the time of forecasting is higher than an estimated threshold of 1.8%. The bias is most pronounced at intermediate forecasting horizons. This suggests that inflation is projected to revert towards the target too quickly. These results cannot be fully explained by the persistence embedded in the forecasting models nor by errors in the exogenous assumptions on interest rates, exchange rates or oil prices. The state-dependent bias may be consistent with the aim of managing inflation expectations, as published forecasts play a central role in the ECB’s monetary policy communication strategy.

Keywords: Inflation Forecasts, Forecast Evaluation, ECB, Central Bank Communication

JEL Classification: C12, C22, C53, E31, E52

Suggested Citation

Granziera, Eleonora and Jalasjoki, Pirkka and Paloviita, Maritta, The Bias of the ECB Inflation Projections: a State-Dependent Analysis (May 22, 2024). Bank of Finland Research Discussion Paper No. 4/2024, Available at SSRN: https://ssrn.com/abstract=4869335 or http://dx.doi.org/10.2139/ssrn.4869335

Pirkka Jalasjoki

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland

Maritta Paloviita

Bank of Finland - Research ( email )

P.O. Box 160
FIN-00101 Helsinki
Finland
+358 9 1831 (Phone)
+358 9 1832560 (Fax)

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