Tuesday, November 13, 2012

Who says RBA forecasts are hopeless?

The Reserve Bank says so.

Me on ABC NightLife, Wednesday November 14

9 minutes, play or CLICK THEN CLICK AGAIN to download mp3

Me on ABC Adelaide 891, Wednesday November 14

6 minutes, play or CLICK THEN CLICK AGAIN to download mp3

Who says most Reserve Bank forecasts are hopeless?

The Reserve Bank itself says so in a research paper released Monday.

To be strictly accurate, the paper is by two of its economists Peter Tulip and Stephanie Wallace. Released by the Bank, it is prefaced by the usual warning that its findings “do not necessarily reflect” those of the Bank. Nevertheless Tulip and Wallace find Reserve Bank forecasts explain only 15 per cent of the variation in unemployment in the short term and beyond that are “less accurate than a random walk”.

The Bank’s forecasts for GDP growth aren’t likely to be accurate at any time. Even in the very short-term the historic mean provides a better guide. For the year to December 2013 the Bank is forecasting economic growth of somewhere between 2.25 and 3.25 per cent. Tulip and Wallace say a more likely range is somewhere between 0.9 and 5.7 per cent.

The Bank’s forecasts for inflation are pretty good (better than those of the market) but only for one year ahead. After that they also are also no better than random. Tulip and Wallace say the best longer term predictor of inflation is 2.5 per cent, which is the centre of the Reserve Bank’s target band. The finding makes sense. The Bank is good at hitting its target

And what about market forecasts of the RBA’s own decisions? Tulip and Wallace say the judgements backed with money and baked into the yield curve predict short-term interest rates “only slightly better than a random walk”. Sorry.

In today's CBD

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. Are Some Forecasters Really Better Than Others? Oh my

. The right way to present forecasts