Simulation of ECB decisions and forecast of short term Euro rate with an adaptive fuzzy expert system

Abstract

The elaboration of optimal monetary policy strategies, and the statistical estimation of monetary policy rules followed by European Central Bank (ECB) in the new currency area of the Euro, are difficult to follow with the standard statistical models. For this reason we have developed an adaptive fuzzy expert system in order to mimic the framework on which the monetary policy strategy of the ECB is based. The expert system knowledge base consists of a set of fuzzy and crisp rules located at two different hierarchical levels. The high-level of the system receives some intermediate output values from the low-level and processes this information by means of a set of crisp rules. The low-level prepares these intermediate output values with the use of a fuzzy inference engine applied to economic input variables. The use of an expert system allows for modelling the ECB behaviour with the use of wider scope of knowledge, when compared with more traditional computational techniques. Rules at different hierarchical levels and at different intra-level groups, allow for managing the potentially contradictory structure of the ECB strategy. The system has been tested on the economic and financial time series going from the January 1999 to September 2000. The system’s correct prediction was estimated to overall 70% and, considering the complexity of the task, the results obtained are promising.