Forecast combination and the Bank of England's suite of statistical forecasting models

Abstract

The Bank of England has constructed a ‘suite of statistical forecasting models’ (the ‘Suite’) providing judgement-free statistical forecasts of inflation and output growth as inputs into the forecasting process, and to offer measures of relevant news in the data. The Suite focuses on combining in an optimal way a small number of forecasts generated using different sources of information and methodologies. The main combination methods employ weights that are equal or based on the Akaike information criterion (using likelihoods built from estimation errors). This paper sets a general context for this exercise, and describes some features of the Suite as it stood in May 2005. The forecasts are evaluated over the period of Bank independence (from 1997 Q2) by a mean square error criterion. The forecast combinations generally lead to a reduction in forecast error, although over this period some of the benchmark models are hard to beat.