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BANCA NA

IONAL
A
NIEI
BANCA
NAIONAL
AROM
ROMNIEI

Outline:
The forecasting process
The model
Further developments

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The forecasting process


Stages:
Near 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)

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Flow of information in the forecasting process at


the National Bank of Romania
Near-term forecast

Near-term models
NTF Inflation, GDP, ex. rate
and expert forecastetc.
Medium-term
(core)
model
Trends
&
Gaps
Assessment of initial conditions
and medium-term trends

Exogenous variables forecasts

Anticipated
shocks, fiscal
impulse, etc.

Final
medium-term
forecast and
risk scenarios

Tunes

Uncertainty
Expert judgment
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Quarterly Forecasting & Decisions Schedule


Time

Event

Details

T-45

Task Force meeting

Model meeting (recalibration and other


developments) - biannually

T-35

Task Force meeting

Near-Term Forecasts NTF (inflation, GDP,


interest rates, exchange rate) and exogenous
scenarios

T-28

Task Force meeting

Initial conditions (GDP, interest rates, exchange


rate gaps), medium run equilibrium conditions
and exogenous variables

T-22

MPC meeting

T-16

Task Force meeting

T-10

MPC meeting

Inflation Report

T+1

MPC meeting

T+7

Bank Board meeting

Initial conditions, equilibrium conditions,


exogenous variables
Final projection meeting
Forecasts and risk scenarios
Forecasts and Inflation Report sent to MPC
Discussion of Inflation Report
Discussion of Inflation Report and monetary
policy decision

Task Force set up to implement IT framework consists of experts from Monetary Policy and
Macroeconomic Modelling Department and Research and Publications Department

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The forecasting process


Characteristics
Based on formalized models and expert judgment
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

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The forecasting process

Role of near-term forecasting


Cover short end of forecast horizon
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

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The forecasting process

Role of medium-term model


Shapes the initial conditions of the forecast rounds
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

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Near-Term Forecasting
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

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Medium-Term Forecasting Framework


1. History of the Model
Work on the NBRs 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 CNBs QPM)

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Medium-Term Forecasting Framework


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
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Medium-Term Forecasting Framework


2. General characteristics of MAMTF

Use of satellite models for:


- 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

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3. Transmission mechanism
NBRs monetary
policy rate
Lending
interest rates
Foreign
interest rate

Consumption
and
investment
borrowing

Consumption/
saving
decisions

Exchange rate (UIP)


Net
exports
channel

Wealth and
balance sheet
effect

Fiscal and
income policies

Balassa-Samuelson
effect

Deposit
interest rates

Excess demand

Exchange rate
pass-through

Administered
and volatile
prices

Import
prices

CORE2 inflation
Expectations

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CPI
inflation

3. Transmission mechanism
Interest rate channel
- relatively slow impact and limited efficiency
- 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
- quite significant; reflects second round effects of inflationary shocks

Wealth and balance sheet channel


- important due to high share of foreign currency loans

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4. Model structure
Inflation components
Core inflation determined by its structural persistence, inflation
expectations, output gap, import price inflation and BalassaSamuelson effect
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)
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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

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Further developments
Implementing a DSGE model:
Advantages over the current model:
Fully structural
Non linear
Non-stationary steady state

Theoretical structure derived specific features


included:
Exchange rate appreciation in steady state
Trends in relative prices across different sectors
Administered prices are included as a component of the CPI
index
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Further developments
Draft evaluation of the model including:
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
Greater role for fiscal policy
Adding a financial sector block
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Thank you for your attention!

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