The bias and efficiency of the ECB inflation projections: A state dependent analysis

G anzie a, Eleono a; Jalasjoki, Pi kka; Palo ii a, Ma i a Wo king Pape The bias and e iciency o he ECB in la ion p ojec ions: A s a e dependen analysis Wo king Pape , No. 1/2021 P o ided in Coope a ion wi h: No ges Bank, Oslo Sugges ed Ci a ion: G anzie a, Eleono a; Jalasjoki, Pi kka; Palo ii a, Ma i a (2021) : The bias and e iciency o he ECB in la ion p ojec ions: A s a e dependen analysis, Wo king Pape , No. 1/2021, ISBN 978-82-8379-189-1, No ges Bank, Oslo, h ps://hdl.handle.ne /11250/2755864 This Ve sion is a ailable a : h ps://hdl.handle.ne /10419/246122 S anda d-Nu zungsbedingungen: Die Dokumen e au EconS o dü en zu eigenen wissenscha lichen Zwecken und zum P i a geb auch gespeiche und kopie we den. Sie dü en die Dokumen e nich ü ö en liche ode komme zielle Zwecke e iel äl igen, ö en lich auss ellen, ö en lich zugänglich machen, e eiben ode ande wei ig nu zen. 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Wo king pape s om No ges Bank, om 1992/1 o 2009/2 can be o de ed by e-mail: Facili ySe ices@no ges-bank.no Wo king pape s om 1999 onwa ds a e a ailable on www.no ges-bank.no No ges Bank’s wo king pape s p esen esea ch p ojec s and epo s (no usually in hei inal o m) and a e in ended in e alia o enable he au ho o bene i om he commen s o colleagues and o he in e es ed pa ies. Views and conclusions exp essed in wo king pape s a e he esponsibili y o he au ho s alone. ISSN 1502-8190 (online) ISBN 978-82-8379-189-1 (online) The Bias and Eciency o he ECB Ina ion P ojec ions: a S a e Dependen Analysis ∗ Eleono a G anzie a † Pi kka Jalasjoki ‡ Ma i a Palo ii a  Ap il 28, 2021 Abs ac We es o bias and eciency o he ECB ina ion o ecas s using a conden ial da ase o ECB mac oeconomic qua e ly p ojec ions. We in es iga e whe he he p ope ies o he o ecas s depend on he le el o ina ion, by dis inguishing whe he he ina ion obse ed by he ECB a he ime o o ecas ing is abo e o below he a ge . The o ecas s a e unbiased and ecien on a e age, howe e he e is e idence o s a e dependence. In pa icula , he ECB ends o o e p edic (unde p edic ) ina ion a in e media e o ecas ho izons when ina ion is below (abo e) a ge . The magni ude o he bias is la ge when ina ion is abo e he a ge . These esul s hold e en a e accoun ing o e o s in he ex e nal assump ions. We also nd e idence o ineciency, in he o m o unde eac ion o news, bu only when ina ion is abo e he a ge . Ou ndings bea impo an implica ions o he ECB o ecas ing p ocess and ul ima ely o i s communica ion s a egy. Keywo ds : Fo ecas E alua ion, Fo ecas Eciency, Ina ion Fo ecas s, Cen al Bank Commu- nica ion JEL classica ion : C12, C22, C53, E31, E52 ∗ This Wo king Pape should no be epo ed as ep esen ing he iews o No ges Bank, he Bank o Finland o he Eu osys em. The iews exp essed a e hose o he au ho s and do no necessa ily eec hose o No ges Bank, he Bank o Finland o he Eu osys em. We hank Ge gely Ganics, Juha Kilponen, Ja mo Kon ulainen, Ba ba a Rossi, Ta e ik Sekhposyan, and con e ence pa icipan s a he 14 h In e na ional Con e ence on Compu a ional and Financial Econome ics, 2nd Vienna Wo kshop on Economic Fo ecas ing, 28 h Annual Symposium o he Socie y o Nonlinea Dynamics and Econome ics, 3 d Fo ecas ing a Cen al Banks Con e ence, he 2019 Con e ence on Real-Time Da a Analysis, Me hods and Applica ions. We also hank an anonymous e e ee om he No ges Bank Wo king Pape se ies. † Co esponding Au ho . No ges Bank; email: [email p o ec ed] ‡ Bank o Finland. Email: pi kka.jalasjoki@bo .  Bank o Finland. Email: ma i a.palo ii a@bo . 1 In oduc ion Fo ecas ing is an essen ial pa o mone a y policy making and published o ecas s a e a he co e o cen al bank communica ion s a egy, pa icula ly o cen al banks a ge ing ina ion. In ac , cen al bank ina ion o ecas s aec p i a e sec o expec a ions (see e.g. Fujiwa a (2005), Hube (2014,2015,2017) and Lyziak and Palo ii a (2018)). Ina ion p ojec ions published by mone a y au ho i ies a e likely o gain u he p ominence in expec a ions managemen and se e as an addi ional policy ool. In he cu en en i onmen o low in e es a es and low ina ion, as he maneu e ing space o adi ional ools is limi ed, policies di ec ly impac ing agen s' ina ion expec a ions can be used o s abilize economic condi ions (Coibion e al.,2020). In addi ion, as cen al banks econside hei s a egies and assess make-up ules such as a e age ina ion a ge ing, published o ecas s migh be used o c ea e he expec a ion ha ina ion will o e shoo i s a ge . Howe e , published ina ion p ojec ions ha e gone unde sc u iny. The accu acy o cen al banks' o ecas s dec eased du ing he nancial c isis (Po e (2011), S ock on (2012), Alessi e al. (2014), Fawce e al. (2015)). Also, ollowing he c isis many mone a y au ho i ies ha e consis en ly o e es ima ed he a e o ina ion (I e sen e al. (2016), Kon ogeo gos and Lamb ias (2019)), which has emained pe sis en ly below a ge . Repea ed la ge and sys ema ic p ojec ion e o s pose a chal- lenge o cen al banks as hese e o s may inc ease he isk o deancho ing o ina ion expec a ions and de e io a e he c edibili y o mone a y au ho i ies. Agains his backg ound we analyze he p ope ies o he Eu osys em/Eu opean Cen al Bank s a (he ea e ECB) p ojec ions o ina ion. Fi s , we check whe he he o ecas s a e biased by es ing whe he he o ecas e o s ha e mean ze o (Holden and Peel,1990). Second, we in es iga e whe he p ojec ions a e ecien by es ing whe he he ex-pos o ecas e o is unco ela ed wi h he p e ious o ecas e isions, ollowing No dhaus (1987) and Coibion and Go odnichenko (2015). As a no el con ibu ion we ela e bias and eciency o he economic condi ions a he ime o o ecas ing. Specically, we ask whe he sys ema ic o ecas e o s a e ela ed o he le el o ina ion, by dis inguishing whe he ina ion is abo e o below a ge when he o ecas s a e made. We conjec u e ha , because o he ECB p ice s abili y manda e, he le el o ina ion obse ed a he ime o o ecas ing migh inuence he way in which new in o ma ion is inco po a ed in he o ecas s. 2 We analyze he ECB p ojec ions o he Eu o A ea HICP ina ion a e. We ocus only on ina ion because he manda e o he ECB is dened in e ms o p ice s abili y. Ou da a include eal ime es ima es o cu en -qua e alues and eal ime p ojec ions un il eigh qua e s ahead. No e ha in e e y qua e he ECB publishes annual p ojec ions o ull calenda yea s, while ou da ase includes o iginal conden ial qua e ly p ojec ions, which a e una ailable o he public. 1 On a e age, we nd no sign o bias no ineciency in ina ion o ecas s. Howe e , we documen a signican die ence in he p ope ies o he o ecas s depending on he le el o ina ion a he ime o o ecas ing. In pa icula , we de ec a sys ema ic bias, bo h s a is ically and economically signican , o medium e m o ecas s when condi ioning on he le el o ina ion. This sugges s ha when ina ion is lowe (highe ) han he a ge , he ECB ends o o e p edic (unde p edic ) ina ion. The e o e, we conclude ha he e is a sys ema ic bias owa ds he a ge . We also documen ha he magni ude o he bias is conside ably la ge in absolu e alue when ina ion is abo e he a ge . The ECB p ojec ions a e condi ional o ecas s, i.e. hey a e based on assump ions ega ding a pa h o u u e alues o ele an mac oeconomic and nancial a iables. One migh a gue ha sys ema ic e o s in hese ex e nal assump ions migh esul in o sys ema ic e o s in ina ion o ecas s. Howe e , we nd ha , while he p edic ion e o s in ina ion a e co ela ed wi h e o s in he ex e nal assump ions, he ina ion o ecas s exhibi a signican sys ema ic bias e en a e con olling o e o s in hese assump ions. Biased o ecas s a e no necessa ily i a ional. Capis an (2008) asc ibes he bias o an asym- me ic loss unc ion o he cen al bank, and shows ha o e p edic ion occu es when he mone a y au ho i y is mo e conce ned abou ina ion abo e han below a ge . Cha emza and Ladley (2016) show ha a bias owa ds he a ge can esul om he o ing sys em and dynamics wi hin he mone a y policy commi ee. He be (2020) shows ha i is op imal o he mone a y au ho i y o sys ema ically o e p edic (unde p edic ) agg ega e condi ions in ecessions (expansions) in o de o bias agen s' belie s, i agen s ha e he e ogeneous p io s abou he s a e o he economy. In a labo a o y expe imen , Duy and Heinemann (2021) nd ha hei es subjec cen al banke s ac s a egically and make announcemen s ha de ia e om he " ue" o ecas s in o de o manage agen s' ina ion expec a ions. While we do no iden i y he sou ce o he s a e dependen bias, we 1 The ECB s a ed o publish qua e ly p ojec ions in 2017Q2. 3 no e ha i is consis en wi h a s a egic beha iou o a cen al bank aiming a s ee ing expec a ions owa ds he a ge . Rega ding eciency, we nd ha o ecas e isions do p edic o ecas e o s, bu only when he de ia ions o ina ion om he a ge a e posi i e. In pa icula , when ina ion is abo e he a ge , he es ima ed coecien associa ed wi h he e isions is posi i e. This means ha , o example, when he e ision is posi i e, i.e. he new o ecas is highe han he o ecas made in he p e ious pe iod, he o ecas e o is posi i e, i.e. he ECB unde p edic s, so he o ecas was no e ised "enough". These ndings poin o an "unde - eac ion" o he ECB o new in o ma ion, and can be due o in o ma ion igidi ies (Coibion and Go odnichenko,2015) o smoo hing (Tillman,2011). 2 A la ge numbe o pape s has analyzed he bias and eciency o he o ecas s p oduced by he Fede al Rese e: Clemen s e al. (2007), Capis an (2008), Sinclai e al. (2010), Messina e al. (2015) and El-Shagi e al. (2016) o G eenbook o ecas s, and Rome and Rome (2008) and A ai (2016) o FOMC. We depa om hese s udies in wo dimensions:  s , we analyze bias and eciency o he ECB p ojec ions, which ha e no been s udied p e iously, wi h he excep ion o Kon ogeo gos and Lamb ias (2019). 3 No e ha se e al ins i u ional die ences dis inguish he ECB om he Fede al Rese e. The ECB's manda e is dened in e ms o p ice s abili y, while he Fed has a dual manda e. The Fed has an explici a ge o 2% o ina ion, while he ECB aims a keeping ina ion below, bu close o 2%. Finally, he Fed p oduces wo se s o o ecas s: he Tealbook (ea lie G eenbook) o ecas s, which ep esen s a o ecas s and a e kep conden ial o  e yea s, and he FOMC p ojec ions, which summa ize he o ecas s o he FOMC membe s and a e a ailable o he public in eal ime. In con as , he ECB p ojec ions a e s a o ecas s, simila ly o he Tealbook, bu hey a e eleased o he public in he same qua e in which hey a e p oduced, like he FOMC o ecas s. These die ences migh aec he p ope ies o he o ecas s and he e o e he ndings documen ed o he Fed's o ecas s migh no hold in he ECB con ex . Second, only ew pape s in es iga e whe he he p ope ies o he o ecas s a e s a e dependen , and hey dene he s a es acco ding o he phases o he business cycle, i.e. ecessions o expansions, 2 Some ecen s udies analyze o ecas eciency using su ey-based expec a ions o households and p o essional o ecas e s and epo conic ing esul s ega ding unde - o o e - eac ion o news (Fuh e (2018), Angele os e al. (2020), Bo dalo e al. (2020), Kohlhas and Wal he (2021)). These s udies igno e s a egic mo i es in mone a y policy communica ion, which migh be p esen in o ecas s made by an ina ion- a ge ing cen al bank. 3 Kon ogeo gos and Lamb ias (2019) ocus on o ecas ing accu acy, eciency, a ionali y and op imali y and conclude ha he ECB p ojec ions o ina ion a e unbiased and ecien on a e age. 4 a he ime when he ou come is ealized. We die because we in es iga e whe he he p ope ies o he o ecas s a e ela ed o he le el o ina ion wi h espec o he a ge and we dene he s a e based on he le el o ina ion a he ime o o ecas ing . The e o e, we ela e bias and eciency o he ECB manda e and i s o ecas ing p ocess. The es o he pape is o ganized as ollows: sec ion 2 p esen s he da a, sec ion 3 summa izes he baseline econome ic amewo k and empi ical esul s, sec ion 4 desc ibes he s a e dependen analysis and esul s, sec ion 5 concludes. 2 Da a We analyze he ECB p ojec ions o he yea -o e -yea Eu o A ea Ha monized Index o Con- sume P ices (HICP) ina ion a e a he qua e ly equency. Ou da a include eal ime es ima es o cu en -qua e alues (nowcas es ima es) and eal ime p ojec ions un il eigh qua e s ahead. No e ha in e e y qua e he ECB publishes annual p ojec ions o ull calenda yea s, while ou da ase includes o iginal conden ial qua e ly p ojec ions, which a e una ailable o he public. The sample uns om 1999Q4 o 2019Q4, esul ing in 81 obse a ions o o ecas e alua ion o he nowcas and 73 o he eigh s ep-ahead o ecas s. 4 The mac oeconomic p ojec ions a e p oduced by he ECB s a in Ma ch and Sep embe , and by bo h ECB s a and expe s in na ional cen al banks in June and Decembe . Howe e , in each qua e mon hly ina ion p ojec ions a e p o ided by na ional cen al bank expe s o o ecas ing ho izon up o 11 mon hs, h ough he Na ow Ina ion P ojec ion Exe cise (NIPE). Finally, he p ojec ions a e based on a se ies o assump ions and a e p oduced combining models as well as expe knowledge and judgemen . 5 The mac oeconomic p ojec ions play a key ole in mone a y policy decision-making, as he o ecas s a e p esen ed o he Go e ning Council ahead o i s mone a y policy delibe a ions. Panel A o Figu e (1) shows he yea -o e -yea Eu o A ea HICP ina ion om 1999Q4 o 2019Q4. Ou sample pe iod includes he ela i ely s able p e-c isis yea s, ollowed by he nancial c isis, he so e eign deb c isis and mo e ecen ly a pe iod o pe sis en ly low ina ion. 4 We e alua e he o ecas s agains he in age published by Eu os a in Ap il 2020. We do no expe imen wi h o he in ages since bo h means and medians o da a e isions o eal- ime obse ed ina ion a e close o ze o. 5 Alessi e al. (2014) and Kon ogeo gos and Lamb ias (2019) p o ide u he de ails on he ECB o ecas ing p ocess. 5 Panel B o Figu e (1) summa izes he p ojec ions o die en o ecas ho izons o e he whole sample. Fo each o ecas o igin he gu e shows selec ed quan iles o he p ojec ed pa h om nowcas ing o wo yea s ahead. The solid lines show he median p ojec ion o each ho izon con- di ional on he a e o ina ion in he qua e when he o ecas s a e p oduced. In pa icula , he blue ( ed) line shows he median ina ion o ecas s i ina ion is abo e (below) 1.8% a he ime o o ecas ing. The ed (blue) shaded a eas deno e he 10 h and 25 h (75 h and 90 h) pe cen iles o he dis ibu ion condi ional on ina ion being below (abo e) a ge . Rega dless o hei ini ial le el, he o ecas s e e owa ds he a ge a he quickly, wi hin he  s 4 qua e s, and a en ou a longe ho izons. Also, when ina ion is abo e a ge a he ime o o ecas ing, he e is e idence o unde shoo ing ( o ecas ing ina ion o all below a ge ) om 4 o 10 qua e s ahead. 3 Tes ing o Bias and Eciency In his sec ion, we analyze he p ope ies o he ECB ina ion o ecas s. Fi s , we es o bias by es ing whe he he o ecas e o s ha e ze o mean (Holden and Peel (1990), Capis an (2008), Kon ogeo gos and Lamb ias (2019)):  ,h =y −y | −h=α0,h +u ,h h= 0, ..8 (1) whe e  ,h is he h -s ep ahead o ecas e o , y is he ealized alue and y | −h is he o ecas o y made a ime −h. Then, he null o unbiasedness is α0,h = 0 . Second, we in es iga e whe he p ojec ions a e inecien , i.e. whe he he e was addi ional in o ma ion eadily a ailable o he o ecas e s ha could ha e been used o imp o e he accu acy o he p ojec ions. Specically, we es whe he he o ecas e o is unco ela ed wi h he p e ious o ecas e ision: i he o ecas e ision be ween −h−1 and −h can p edic he o ecas e o , hen he in o ma ion ha became a ailable a −h was no p ope ly inco po a ed in he e ised p ojec ions, i.e. he o ecas s we e o e ly o insucien ly adjus ed. 6 This app oach was o iginally sugges ed by No dhaus (1987) and has been ecen ly adop ed by Lahi i and Sheng (2008), Coibion and Go odnichenko (2015), Fuh e (2018) and Bo dalo e al. (2020). Fo ecas eciency can be 6 The alidi y o ou esul s is con med using al e na i e es s o bias and eciency, ollowing Mince and Za nowi z (1969) and Loungani e al. (2013). Resul s o hese exe cises a e a ailable om he au ho s upon eques . 6 his nding. 4.3 The Role o Ex e nal Assump ions The ECB p ojec ions a e condi ional on a numbe o ex e nal assump ions, i.e. echnical assump- ions ega ding he u u e de elopmen s o he in e na ional economic en i onmen . 13 Then, one could a gue ha sys ema ic e o s ound in he ina ion p ojec ions migh be d i en by sys ema ic e o s in ex e nal assump ions, which esul in bias and ineciency. Gi en ou access o he assump ions o he ex e nal a iables, we a e in a unique posi ion o es his conjec u e. We ocus on h ee a iables which a e conside ed he main d i e s o ina ion: a sho e m in e es a e (3M EURIBOR), he EURUSD exchange a e and he B en C ude oil p ices. The assump ions made by he ECB o he oil p ices and in e es a es a e ob ained om u u es p ices while he exchange a e is assumed o be cons an h ough he o ecas ho izon, consis en wi h he p edic ion om a andom walk model. No e ha hese condi ioning assump ions a e comple ely exogenous, he e o e no aec ed by he ECB p ojec ions published in he same qua e . In o de o assess he ole o ex e nal assump ions in ina ion p ojec ions, we add he o ecas e o s in ex e nal assump ions as addi ional p edic o s in he bias eg ession models (1) and (3). Dene he e o in he ex e nal assump ion i a ime o ho izon h as: ζi ,h =xi −xi | −hi= 1, .., 3; h= 0, ..8 (5) whe e xi is he ealiza ion and xi | −h is he alue assumed a −h o da e . The a iable xi is he le el o in e es a e o exchange a e, o he g ow h a e o oil p ices. Fi s , we es whe he he e o s in he ex e nal assump ions a e biased in bo h he uncondi ional and s a e dependen cases: ζi ,h =αi 0+ei ,h i= 1, .., 3; h= 0, ..8 (6) ζi ,h =αi 0+αi 1,hd −h+ei ,h i= 1, .., 3; h= 0, ..8 (7) 13 Kon ogeo gos and Lamb ias (2019) nd ha e o s in hese ex e nal assump ions dec ease he accu acy o he ECB p ojec ions o ina ion. 13 whe e d −h is he dummy cons uc ed as in 4.1. I we we e o nd some sys ema ic bias in he condi ional model, one could a gue ha i explains he sys ema ic bias obse ed in he ina ion o ecas e o s. Then, we un he ollowing eg ession, which includes he e o ζi ,h as an addi ional p edic o :  ,h =βi 0,h +βi 1,hd −h+βi 2,hζi ,h +ui ,h i= 1, .., 3; h= 0, ..8 (8) whe e,  ,h is he o ecas e o o p edic ing ina ion a o ecas o igin o ho izon h . I he es ima ed pa ame e s βi 0,h and βi 1,h we e no signican in (8), while βi 2,h we e signican , he bias in he ina ion o ecas s could be a ibu ed o he bias in he ex e nal assump ions. Ideally, o ca y ou ou in es iga ion, we would  s cons uc a coun e ac ual se ies o adjus ed e o s o ina ion by using in e nal ECB models condi ioned on he ue ealiza ion o he ex e nal a iables, and hen check whe he he adjus ed e o s a e biased. Howe e , we a e unable o cons uc such coun e ac ual se ies based on he o ecas ing models used in eal ime o o include he ECB expe judgemen . We hink ha ou simple app oach is sensible because i sys ema ic e o s in he ex e nal assump ions we e d i ing he o ecas e o s, hen he dummy should no ha e addi ional explana o y powe . Resul s o eg essions (6) and (7) a e displayed in Table (4) o he Appendix. Panel A shows ha in e cep e m in he eg essions o he sho e m a e is nega i e, meaning ha on a e age he sho e m a e is assumed o be la ge han he ealized alue. This holds a e e y ho izon, al hough he coecien s a e signican only a longe ho izons. In he s a e dependen eg essions he cons an is s ill nega i e and signican , while he dummy is posi i e bu no s a is ically signican ly die en om ze o, sugges ing ha he e is sys ema ic bias only when ina ion is abo e a ge . The bias is la ge in absolu e e ms, up o 70 basis poin s, when ina ion is abo e a ge . The esul s o he exchange a e show no e idence o bias on a e age (Panel B). Howe e , when ina ion is abo e (below) he a ge he exchange a e e sus he US dolla is assumed o be weake (s onge ) han ealized. The coecien s associa ed wi h he cons an and he dummy a e signican o all ho izons highe han wo and he bias inc eases wi h he ho izon. Finally, he oil p ice assump ions a e no biased on a e age. In con as , he s a e dependen analysis shows ha a e y sho ho izons he e is e idence o unde p edic ion (o e p edic ion) when 14 ina ion is highe (lowe ) han he a ge . This is consis en wi h he sys ema ic bias obse ed o ina ion. Howe e , he size o he bias is small, amoun ing o 0.06p.p. a mos . Resul s o eg essions (8) a e epo ed in Panel C1 h ough C3 o Table (1). Rega dless o he ex e nal assump ion conside ed, adding he o ecas e o s o he bias eg ession does no al e he sign, he magni ude no he signicance o he coecien s obse ed in Panel B o Table (1). The in e es a e o ecas e o s a e signican only a ho izons one and wo and en e posi i ely, so ha a la ge o ecas e o o in e es a es p edic s a la ge o ecas e o o ina ion. Simila ly, in he bias eg ession augmen ed by he exchange a e o ecas e o s, hese e o s a e no signican . Finally, he oil p ice o ecas e o s a e highly signican a sho e m ho izons and exhibi a posi i e coecien , implying ha a highe o ecas e o o oil p ices ansla es in o a highe o ecas e o o ina ion. While he magni ude o he coecien is again unchanged, he cons an and he dummy a e signican only o h ee qua e s ahead o ecas s. In sum, we nd e idence o sys ema ic o e (unde )p edic ion o medium e m p ojec ions when ina ion is lowe (highe ) han he a ge e en when con olling o he e o s in ex e nal assump- ions. 5 Conclusion Using a conden ial da ase o ECB mac oeconomic qua e ly p ojec ions we documen h ee no el ndings ha ela e he bias and eciency o he ECB ina ion o ecas s o he le el o ina ion a he ime o o ecas ing: (i) a sys ema ic bias owa ds he a ge a medium ho izons, which implies o e (unde ) p edic ion when ina ion is low (high); (ii) a la ge bias when ina ion is abo e he a ge ; (iii) ineciency, esul ing in unde u iliza ion o new in o ma ion a medium ho izons when ina ion is abo e a ge . Ou esul s sugges ha looking a s a e dependence is c ucial. We a gue ha heo e ical models a e unable o eplica e he obse ed s a e dependence in bias and eciency and hence, hey migh need o be e o mula ed in o de o ma ch hese ea u es o he o ecas s. Gi en he lack o heo e ical models ha can simul aneously accoun o s a e dependen bias and ineciency in cen al banks' o ecas s, his pape has he po en ial o s a a line o heo e ical esea ch ha a ionalizes hese ndings. 15 Ou in es iga ion o he p ope ies o he published p ojec ions is ele an also om a policy pe spec i e, in pa icula o he ongoing ECB s a egy e iew: he o ecas s o m he basis o he mone a y policy decisions o he ECB Go e ning Council and ep esen an impo an communica ion ool. While he easons behind ou ndings a e beyond he scope o his pape , we conjec u e ha he e idence o s a e dependen bias and ineciency migh be ela ed o s a egic mo i es in mone a y policy communica ion. These a e pa icula ly s ong a he in e media e ho izons, eec ing he medium- e m o ien a ion o mone a y policy making. 16 Figu e 1: HICP Ina ion and Ina ion P ojec ions 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 * (a) Panel A: HICP Ina ion and Dis ibu ion o S a es Ac oss Time 01234567891011 o ecas ing ho izon -0.5 0 0.5 1 1.5 2 2.5 3 3.5 4 o ecas s (b) Panel B: ECB P ojec ions o HICP Ina ion: Pa hs Panel A. The gu e shows he yea -o e -yea HICP ina ion o he Eu o A ea and he pe iods in which ina ion is below he a ge , i.e. 1.8% (shaded a eas). Panel B. The gu e shows o each o ecas ing ho izon he maximum and minimum ina ion p ojec ions, he 10 h and 25 h ( 75 h and 90 h ) pe cen iles and he medians condi ional on whe he ina ion was abo e o below he a ge (1.8%, g een dashed line) du ing each p ojec ion exe cise. 17 Table 1: Bias in ECB Ina ion Fo ecas s Fo ecas Ho izon h= 0 1 2 3 4 5 6 7 8 Panel A: O e all Sample c -0.02 0.03 0.07 0.11 0.13 0.14 0.11 0.07 0.02 (0.01) (0.04) (0.08) (0.11) (0.14) (0.15) (0.15) (0.16) (0.16) Panel B: Asymme y c -0.03* 0.09* 0.19** 0.32*** 0.37** 0.35* 0.31 0.22 0.14 (0.02) (0.05) (0.09) (0.13) (0.16) (0.18) (0.19) (0.20) (0.20) d 0.03 -0.11 -0.25* -0.38* -0.44* -0.38 -0.34 -0.25 -0.16 (0.03) (0.08) (0.15) (0.20) (0.27) (0.29) (0.30) (0.32) (0.33) Panel C1: Sho Te m In e es Ra e c -0.03* 0.11** 0.23** 0.37*** 0.44** 0.46** 0.42** 0.33 0.26 (0.02) (0.05) (0.09) (0.13) (0.17) (0.19) (0.20) (0.21) (0.22) ζ -0.12 0.36** 0.37** 0.27 0.24 0.25 0.21 0.17 0.17 (0.20) (0.13) (0.14) (0.13) (0.12) (0.09) (0.08) (0.07) (0.07) d 0.03 -0.14* -0.28** -0.41** -0.48* -0.44 -0.39 -0.28 -0.18 (0.03) (0.08) (0.14) (0.20) (0.26) (0.28) (0.30) (0.31) (0.32) Panel C2: Exchange Ra e c -0.03 0.10** 0.19** 0.32** 0.34** 0.26 0.15 0.02 -0.10 (0.02) (0.05) (0.09) (0.13) (0.17) (0.19) (0.19) (0.19) (0.18) ζ -0.72 -0.94 0.16 0.11 0.65 1.62 2.49 2.93 3.18 (1.00) (0.73) (0.88) (1.04) (1.17) (1.21) (1.16) (1.03) (0.93) d 0.03 -0.13* -0.24 -0.37* -0.38 -0.21 -0.03 0.14 0.28 (0.03) (0.08) (0.15) (0.22) (0.28) (0.31) (0.31) (0.30) (0.30) Panel C3: Oil P ices c -0.02 0.02 0.12 0.25** 0.29* 0.30* 0.27 0.19 0.10 (0.02) (0.04) (0.09) (0.13) (0.17) (0.17) (0.18) (0.18) (0.18) ζ 0.78*** 1.66*** 1.24*** 1.18* 1.39 1.19 1.01 1.41 1.51 (0.30) (0.26) (0.45) (0.64) (0.85) (0.84) (0.86) (0.91) (0.93) d 0.01 -0.05 -0.18 -0.35* -0.41 -0.40 -0.37 -0.25 -0.15 (0.03) (0.07) (0.14) (0.20) (0.26) (0.26) (0.28) (0.29) (0.29) No e: Es ima ed coecien s om eg essions (1), (3) and (8). Newey-Wes s anda d e o s a e in pa en he- sis. S a s deno e he 10% (*), 5% (**) and 1% (***) signicance le el. Fo eg essions in ol ing he sho e m in e es a es, no e ha be o e 2006 an assump ion o cons an sho e m in e es a es was used. 18 Table 2: Eciency in ECB Ina ion Fo ecas s Fo ecas Ho izon h = 0 1 2 3 4 5 6 7 Panel A: O e all Sample c -0.02 0.02 0.05 0.09 0.12 0.12 0.09 0.04 (0.01) (0.04) (0.08) (0.12) (0.16) (0.16) (0.17) (0.17) ,h 0.03 0.11 0.20 0.36 -0.09 -0.59 -0.26 -0.32 (0.05) (0.10) (0.21) (0.30) (0.78) (0.95) (0.87) (0.91) Panel B: Asymme y c -0.04* 0.06 0.16* 0.28** 0.37** 0.35** 0.30 0.20 (0.02) (0.05) (0.09) (0.12) (0.16) (0.18) (0.19) (0.20) ,h 0.04 0.17 0.22 0.56* 0.11 -0.50 -0.18 -0.70 (0.06) (0.13) (0.24) (0.31) (0.78) (1.14) (1.09) (1.28) d 0.03 -0.09 -0.22 -0.34* -0.48* -0.40 -0.38 -0.27 (0.03) (0.08) (0.14) (0.19) (0.27) (0.30) (0.31) (0.33) ,h ×d 0.00 -0.18 -0.06 -0.26 0.10 0.65 0.26 0.29 (0.09) (0.19) (0.36) (0.49) (1.37) (1.69) (1.55) (1.69) No e: Es ima ed coecien s om eg essions (2) and (4). Newey-Wes s anda d e o s a e in pa en hesis. 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Wha does "below, bu close o, wo pe cen " mean? assessing he ecb's eac ion unc ion wi h eal ime da a. In e na ional Jou nal o Cen al Banking , o hcoming. Po e , S. (2011). The Failu e o Fo ecas he G ea Recession. Technical epo , h ps://libe ys ee economics.newyo k ed.o g/. Rome , C. D. and D. H. Rome (2008). The omc e sus he s a: Whe e can mone a y policymake s add alue? Ame ican Economic Re iew 98 (2). 22 Table 7: Robus ness o Bias: Technical Recessions Fo ecas Ho izon h= 0 1 2 3 4 5 6 7 8 Panel A: O e all Sample c -0.02 0.03 0.07 0.11 0.13 0.14 0.11 0.07 0.02 (0.01) (0.04) (0.08) (0.11) (0.14) (0.15) (0.15) (0.16) (0.16) Panel B: Asymme y c -0.02 0.07 0.14 0.25** 0.29* 0.32* 0.27 0.21 0.14 (0.02) (0.05) (0.09) (0.12) (0.16) (0.17) (0.18) (0.18) (0.19) d 0.01 -0.11 -0.18 -0.28 -0.34 -0.45 -0.35 -0.30 -0.21 (0.03) (0.09) (0.18) (0.24) (0.31) (0.32) (0.34) (0.35) (0.36) Coecien es ima es om eg ession (3). We dene he s a e acco ding o he phases o he business cycle. Then, he dummy akes he alue o one du ing echnical ecessions, when ou pu g ow h is below he 25 h quan ile o i s dis ibu ion. Table 8: Bias in Published P ojec ions Fo ecas Ho izon cu en yea nex yea yea a e nex Panel A: O e all Sample c 0.02 0.14 0.12 (0.02) (0.12) (0.15) Panel B: Asymme y c 0.04 0.28** 0.18 (0.03) (0.14) (0.19) d -0.05 -0.35 -0.17 (0.05) (0.23) (0.30) Coecien es ima es om eg ession (3). 29 Table 9: Eciency o ECB Ina ion Fo ecas s: Al e na i e Values o Ta ge Fo ecas Ho izon h = 0 1 2 3 4 5 6 7 Panel A: π∗= 1.7 c -0.04* 0.07 0.16* 0.28*** 0.36** 0.35** 0.30* 0.21 (0.02) (0.05) (0.09) (0.12) (0.16) (0.17) (0.18) (0.20) ,h 0.04 0.15 0.23 0.56** 0.21 -0.48 -0.33 -0.84 (0.06) (0.11) (0.21) (0.29) (0.71) (0.89) (0.84) (0.95) d 0.03 -0.10 -0.22 -0.34* -0.47* -0.38 -0.42 -0.29 (0.03) (0.08) (0.14) (0.19) (0.27) (0.29) (0.30) (0.32) ,h ×d 0.01 -0.17 -0.05 -0.24 0.16 2.54 2.04 1.43 (0.09) (0.20) (0.38) (0.51) (1.59) (2.17) (1.85) (1.79) Panel B: π∗= 1.9 c -0.06* 0.01 0.06 0.16 0.19 0.19 0.21 0.15 (0.02) (0.06) (0.11) (0.14) (0.20) (0.21) (0.22) (0.22) ,h 0.10 0.23 0.33 0.72** 0.18 -0.45 -0.16 -1.03 (0.07) (0.14) (0.27) (0.37) (0.90) (1.26) (1.23) (1.41) d 0.06 0.03 0.02 -0.03 -0.01 0.04 -0.10 -0.08 (0.03) (0.08) (0.15) (0.20) (0.27) (0.30) (0.31) (0.33) ,h ×d -0.06 -0.18 -0.10 -0.36 0.32 0.85 0.21 0.83 (0.10) (0.20) (0.37) (0.51) (1.39) (1.77) (1.62) (1.77) No e: Es ima ed coecien s om eg essions (4). Newey-Wes s anda d e o s a e in pa en hesis. S a s deno e he 10% (*), 5% (**) and 1% (***) signicance le el. 30 Table 10: Eciency o ECB Ina ion Fo ecas s: In o ma ion Se Fo ecas Ho izon h = 0 1 2 3 4 5 6 7 Panel A: πI −h=π −h| −h c -0.04** 0.06 0.16* 0.27** 0.36** 0.38** 0.32* 0.22 (0.02) (0.05) (0.09) (0.12) (0.16) (0.18) (0.19) (0.20) ,h 0.05 0.16 0.22 0.60** 0.13 -0.36 -0.04 -0.66 (0.06) (0.13) (0.24) (0.32) (0.80) (1.15) (1.08) (1.27) d 0.05 -0.06 -0.22 -0.36* -0.51* -0.53* -0.46 -0.35 (0.03) (0.08) (0.15) (0.20) (0.27) (0.30) (0.31) (0.34) ,h ×d 0.03 -0.17 -0.13 -0.47 -0.45 -0.06 -0.25 0.02 (0.10) (0.20) (0.37) (0.50) (1.38) (1.70) (1.55) (1.70) Panel B: πI −h=π −h c -0.05** 0.06 0.16 0.26** 0.36** 0.34* 0.26 0.16 (0.02) (0.05) (0.10) (0.13) (0.17) (0.19) (0.20) (0.21) ,h 0.06 0.16 0.25 0.65** 0.16 -0.42 -0.19 -0.82 (0.07) (0.14) (0.25) (0.34) (0.83) (1.19) (1.12) (1.30) d 0.05 -0.08 -0.20 -0.32 -0.43 -0.35 -0.26 -0.14 (0.03) (0.08) (0.15) (0.20) (0.27) (0.30) (0.31) (0.33) ,h ×d -0.01 -0.16 -0.16 -0.52 -0.16 0.42 0.23 0.51 (0.10) (0.20) (0.37) (0.50) (1.36) (1.73) (1.58) (1.72) No e: Es ima ed coecien s om eg essions (4). Newey-Wes s anda d e o s a e in pa en hesis. S a s deno e he 10% (*), 5% (**) and 1% (***) signicance le el. 31 Table 11: Eciency o ECB Ina ion Fo ecas s: Technical Recession Fo ecas Ho izon h = 0 1 2 3 4 5 6 7 Panel A: O e all Sample c -0.02 0.02 0.05 0.09 0.12 0.12 0.09 0.04 (0.01) (0.04) (0.08) (0.12) (0.16) (0.16) (0.17) (0.17) ,h 0.03 0.11 0.20 0.36 -0.09 -0.59 -0.26 -0.32 (0.05) (0.10) (0.21) (0.30) (0.78) (0.95) (0.87) (0.91) h = 0 1 2 3 4 5 6 7 Panel B: Asymme y c -0.03 0.06 0.13 0.22** 0.28* 0.31* 0.26 0.18 (0.02) (0.04) (0.08) (0.11) (0.15) (0.17) (0.18) (0.19) ,h 0.01 0.00 0.07 0.37 -0.23 -0.04 0.39 -0.29 (0.05) (0.12) (0.23) (0.32) (0.84) (1.27) (1.07) (1.12) d 0.01 -0.09 -0.13 -0.21 -0.32 -0.44 -0.36 -0.31 (0.03) (0.09) (0.16) (0.22) (0.30) (0.32) (0.34) (0.36) ,h ×d 0.09 0.31 0.48 0.35 1.33 0.04 -0.95 -0.47 (0.10) (0.20) (0.37) (0.51) (1.37) (1.71) (1.56) (1.67) No e: Es ima ed coecien s om eg ession (4). We dene he s a e acco ding o he phases o he business cycle. Then, he dummy akes he alue o one du ing echnical ecessions, when ou pu g ow h is below he 25 h quan ile o i s dis ibu ion. Newey-Wes s anda d e o s a e in pa en hesis. S a s deno e he 10% (*), 5% (**) and 1% (***) signicance le el. 32 Table 12: Eciency o Published P ojec ions Fo ecas Ho izon cu en yea nex yea Panel A: O e all Sample c 0.02 0.12 (0.02) (0.09) ,h 0.00 1.39*** (0.03) (0.24) Panel B: Asymme y c 0.10*** 0.46*** (0.05) (0.09) ,h -0.14** 0.30 (0.07) (0.28) d -0.10 -0.57*** (0.06) (0.16) ,h ×d 0.17* 1.04*** (0.09) (0.45) No e: Es ima ed coecien s om eg es- sion (4). Newey-Wes s anda d e o s a e in pa en hesis. S a s deno e he 10% (*), 5% (**) and 1% (***) signicance le el. 33