Download Slide 1

BANCA NAŢIONALĂ
A AROMÂNIEI
BANCA NAŢIONALĂ
ROMÂNIEI
Outline:
• The forecasting process
• The model
• Further developments
BANCA NAŢIONALĂ A ROMÂNIEI
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)
BANCA NAŢIONALĂ A ROMÂNIEI
Flow of information in the forecasting process at
the National Bank of Romania
Near-term forecast
Near-term models
NTF Inflation, GDP, ex. rate etc.
and expert forecast
Assessment of initial conditions
and medium-term trends
Exogenous variables forecasts
Trends & Gaps
Medium-term
(core)
model
Anticipated
shocks, fiscal
impulse, etc.
Final
medium-term
forecast and
risk scenarios
Tunes
Uncertainty
Expert judgment
BANCA NAŢIONALĂ A ROMÂNIEI
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
T
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
BANCA NAŢIONALĂ A ROMÂNIEI
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
BANCA NAŢIONALĂ A ROMÂNIEI
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
BANCA NAŢIONALĂ A ROMÂNIEI
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
BANCA NAŢIONALĂ A ROMÂNIEI
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
BANCA NAŢIONALĂ A ROMÂNIEI
Medium-Term Forecasting Framework
1. History of the Model
• Work on the NBR’s 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 CNB’s QPM)
BANCA NAŢIONALĂ A ROMÂNIEI
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
BANCA NAŢIONALĂ A ROMÂNIEI
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
BANCA NAŢIONALĂ A ROMÂNIEI
3. Transmission mechanism
NBR’s 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
CPI
inflation
CORE2 inflation
Expectations
BANCA NAŢIONALĂ A ROMÂNIEI
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
BANCA NAŢIONALĂ A ROMÂNIEI
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)
BANCA NAŢIONALĂ A ROMÂNIEI
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
BANCA NAŢIONALĂ A ROMÂNIEI
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
BANCA NAŢIONALĂ A ROMÂNIEI
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
BANCA NAŢIONALĂ A ROMÂNIEI
Thank you for your attention!
BANCA NAŢIONALĂ A ROMÂNIEI