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The Eurocoin project: new modelling ideas at central banks Lucrezia Reichlin

The Eurocoin project: new modelling ideas at central banks Lucrezia Reichlin Director General Research European Central Bank. CEPR 20 September 2007. Forecasting at central banks. Complex process involving: Structural and reduced form models

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The Eurocoin project: new modelling ideas at central banks Lucrezia Reichlin

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  1. The Eurocoin project: new modelling ideas at central banks Lucrezia Reichlin Director General Research European Central Bank CEPR 20 September 2007

  2. Forecasting at central banks Complex process involving: • Structural and reduced form models • Expert judgement based on processing of a lot of data • Partly story-telling, partly pure forecast (RCC framework agreement)

  3. How important is expert judgement in forecasting? Very, in the very short run current quarter especially (``Where are we now?’’) ‘NOW-CASTING’

  4. Institution do well in now-casting Why? Conjecture: this is because they exploit timely releases of monthly data within the month to forecast GDP which is available only later. In the Euro area, 6 weeks after the closing of the quarter ECB models: use monthly information to forecast quarterly GDP growth rate BRIDGING

  5. Should we care about the short-run? Yes! It is the only thing we can really forecast

  6. Some numbers Relative Mean Square Forecast Error Performance GDP growth: 1992 - 2001 Quarter GB SPF 0 0.87 0.85 1 1.03 1.03 2 1.16 1.00 3 1.23 1.06 4 1.29 1.06

  7. Where does the Euro-coin project fit in? • Statistical model that mimics expert-judgement process in now-casting: • Based on lots of data: ``data-rich environment’’ • Timely exploitation of early releases • .. and obtain a smooth signal in real time (sort of a moving average)

  8. It has been a very innovative process It has inspired an academic literature in forecasting (many children, some even better than their parents?) Models of this kind are now routinely used in central banks for estimating both GDP and inflation signals

  9. Institutional successes • GDP – similar model (Giannone, Reichlin & Small, JME 2007) • Inflation – as in Eurocoin (see Cristadoro, Forni, Reichlin & Veronese, JMCB 2005) • ECB • Eurosystem of central banks • Federal Reserve, board of governors • Federal Reserve, New York • Swiss National Bank • Central Bank of New Zealand • GDP – several versions being evaluated • GDP – similar model (Giannone, Reichlin & Small, JME 2007) • Inflation – as in Eurocoin (see Cristadoro, Forni, Reichlin & Veronese, JMCB 2005) • Inflation – as in Eurocoin (see Cristadoro, Forni, Reichlin & Veronese, JMCB 2005) • Inflation – as in Eurocoin (see Cristadoro, Forni, Reichlin & Veronese, JMCB 2005)

  10. How well does it work? ECB Forecast Comparison: 1998Q3–2005Q3

  11. How does it work? The importance of timeliness and of a lot of data

  12. Producing a smooth signal: a lead indicator for the moving average (New Zealand)

  13. Conclusion A great project A good example of co-operation between academics and central bank economists … Thanks to the CEPR! (RCC framework agreement)

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