How to Improve Inflation Forecasting in Canada

September 13, 2019

Preview Citation

Format: Chicago

Troy D Matheson. How to Improve Inflation Forecasting in Canada, (USA: International Monetary Fund, 2019) accessed December 22, 2024

Disclaimer: 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.

Summary

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.

Subject: Central bank policy rate, Economic forecasting, Financial services, Inflation, Inflation targeting, Monetary policy, Output gap, Prices, Production

Keywords: Central bank policy rate, Core inflation, Forecasting inflation, Forecasting performance, Global, Higher-than-expected inflation, Inflation, Inflation expectation, Inflation target, Inflation targeting, Output gap, Staffs core inflation error, WP

Publication Details

Pages:

22
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2019/190
Stock No:

WPIEA2019190
ISBN:

9781513509396
ISSN:

1018-5941

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