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Mr. José M. Barrionuevo
A simple criterion based on the properties of the forecast error is presented to evaluate the accuracy of forecasts. The efficiency conditions of an optimization problem are used to show that under rational expectations the standard statistical conditions are necessary, but not sufficient to ensure efficiency. This criterion is used to examine the accuracy of the World Economic Outlook projections of growth and inflation for the seven major industrial countries. Time series models are then estimated and the efficiency of the World Economic Outlook projections relative to a benchmark time series model is examined. A number of empirical tests suggest that the year ahead projections of growth and inflation in the World Economic Outlook are unbiased after 1982.
Mr. José M. Barrionuevo

efficient, with the exception of inflation forecasts for three countries. The absolute value of the average growth and inflation errors generated by time-series models were half of those derived for the World Economic Outlook. The analysis suggests that a fraction of the unexpected inflation rate and growth are included in the time-series projections for the current year across the seven major industrial countries. Time-series forecasts outperform the projections of the World Economic Outlook. This suggests that the accuracy of the World Economic Outlook could

Mr. Troy D Matheson
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.
Mr. Stephen Tokarick and Mr. Michael P. Leidy
In recent years, many countries have successfully reduced their inflation rates to relatively low levels of 2 to 3 percent. The question then arises as to whether it would be desirable to move to even lower rates of inflation. The paper examines the benefits and costs of moving from low inflation to even lower inflation by drawing together recent work on this issue. Once a country has decided to move to an even lower rate of inflation, the question then becomes whether it would be better to achieve this objective through inflation targeting or price-level targeting. The paper critically reviews the arguments for both approaches.
Mr. Jens R Clausen and Bianca Clausen
This paper simulates out-of-sample inflation forecasting for Germany, the UK, and the US. In contrast to other studies, we use output gaps estimated with unrevised real-time GDP data. This exercise assumes an information set similar to that available to a policymaker at a given point in time since GDP data is subject to sometimes substantial revisions. In addition to using real-time datasets for the UK and the US, we employ a dataset for real-time German GDP data not used before. We find that Phillips curves based on ex post output gaps generally improve the accuracy of inflation forecasts compared to an AR(1) forecast but that real-time output gaps often do not help forecasting inflation. This raises the question how operationally useful certain output gap estimates are for forecasting inflation.
International Monetary Fund. Fiscal Affairs Dept.
This Technical Assistance Report discusses the progress made toward developing a medium-term budget framework (MTBF) in Poland. Many of the prerequisites for establishing an MTBF have already been satisfied in Poland. The annual budget has a high degree of credibility; macroeconomic projections are generally accurate; and fiscal rules on debt, expenditure, and the deficit provide sufficient guidance to fiscal policy in the medium term. However, some weaknesses remain that should be addressed either in parallel or as part of the MTBF reform. The design of the MTBF should be carefully considered to meet the government’s fiscal objectives while operating within current capabilities.
Mr. Martin Mühleisen, Ms. Kornelia Krajnyak, Mr. Stephan Danninger, Mr. David Hauner, and Mr. Bennett W Sutton
This paper compares Canadian central government budget forecasting with forecasting by other industrial countries. While fiscal forecasting in Canada is governed by one of the strongest institutional frameworks, quantitative analysis suggests that budget projections of macroeconomic and fiscal aggregates have been more cautious than in other countries since the mid-1990s. The relatively volatile macroeconomic environment as well as institutional factors, such as Canada's asymmetric deficit target, have likely contributed to this outcome.