Front Matter Page
© 2019 International Monetary Fund
WP/19/190
IMF Working Paper
Western Hemisphere Department
How to Improve Inflation Forecasting in Canada Prepared by Troy Matheson
Authorized for distribution by Cheng Hoon Lim
September 2019
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
Abstract
Against the backdrop of an ongoing review of the inflation-targeting framework, this paper examines the real-time inflation forecasts of the Bank of Canada with the aim of identifying potential areas for improvement. Not surprisingly, the results show that errors in forecasting non-core inflation (commodity prices etc.) are found to be the largest contributors to overall inflation forecast errors. Perhaps more importantly, relatively small core inflation forecast errors appear to mask large and offsetting errors related to the output gap and the policy interest rate, partly reflecting a tendency to overestimate the neutral nominal policy rate in real time. Faced with these uncertainties, the Governing Council’s gradual approach to changing its policy settings appears to have served it well.
JEL Classification Numbers: C53, E31, E37
Keywords: Inflation, inflation targeting, real-time data, forecast errors Author’s E-Mail Address: TMatheson@imf.org
Front Matter Page
Abstract
I. Introduction
II. Data
III. Time Series Properties Of Inflation
A. Inflation Persistence
B. Inflation Expectations
IV. Bank Of Canada Staffs Inflation Forecast Errors
A. Inflation Forecast Errors
V. What Went Wrong?
VI. The Output Gap And The Neutral Nominal Policy Rate In Real Time
VII. Summary And Policy Messages
VIII. References
Figures
1. Inflation
2. Inflation Persistence
3. Inflation Cross-Correlations
4. Inflation and Expectations
5. Inflation Forecast Errors and Contributions
6. Historical Shock Dompositions: Inflation and Forecast Errors
7. Real-Time Output Gap and Policy Rate
8. Recent Estimates of Neutral Policy Rate (U.S.)
Tables
1. Inflation Statistics since 2000
2. Inflation Forecast Errors
3. Explaining Staffs Core Inflation Forecast Errors
Appendix
I. Definitions And Model