Sunday, August 17, 2008

Reserve Bank trivia

Why do its forecasts always have the inflation rate returning to its target band?

Coalition politicians at this week's economics committee hearing felt a little pained that RBA had been forecasting inflation within the target band in the lead up to the election (essentially assuring everyone things were fine) and is now saying that that was the very time inflation was taking off.

Here's the revealing answer, from the Bank's Deputy Governor Ric Battellino, at Thursday's hearing:

"Our forecasts - we always have inflation coming back to the band, because by definition it has to.

I mean if you're not forecasting that it's back in the band you are saying by definition we've got the wrong monetary policy.

So you'll see that our forecast and every central bank's forecast for inflation around the world is basically at the end of the forecast period inflation is back in the band. That has to happen."


That's why.

6 comments:

WT said...

D'oh! It's so simple, just forecast to how you want it to be rather than how you think it will be, and by definition you are doing a great job.

WT said...

Sorry, I forgot to add, by my definitions, that's a goal, not a forecast.

Anonymous said...

wt, how they want it to be and how they think it will be are the same thing, which is the point the RBA is making and which point, incredibly, you seem to have missed.

Tick Tock

Anonymous said...

The Deputy Governor said:
"I mean if you're not forecasting that it's back in the band you are saying by definition we've got the wrong monetary policy."

Is that an admission from the Deputy Governor that they had the wrong monetary policy in 2007?

Al

Anonymous said...

I had to read that RBA statement twice.
Most times I read something twice it is of a metaphysical nature, for example the writings of Barry Long or George Gurdjieff. But eventually their statements mean something.
The RBA statement still makes no sense.

Jon said...

Maybe I'm weird (ok, no maybe) but it makes sense to me. Set the policy to X to give you the required outcome of Y. If X doesn't give you Y, then change your policy to something else until your model says that Y will happen.

It's a forecast based on modelling, not staring into a crystal ball.

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