Baseline Forecast Research Articles

Disaggregated Short-Term Inflation Forecast (STIF) for Monetary Policy Decision in Sierra Leone

In this paper, the researchers have developed a short term inflation forecasting (STIF) model using Box-Jenkins time series approach (ARIMA) for analysing inflation and associated risks in Sierra Leone. The model is aided with fan charts for all thirteen components, including the Headline CPI as communication tools to inform the general public about uncertainties that surround price dynamics in Sierra Leone – this then make it possible for policy makers to utilise expert judgments in a bid to stabilize the economy. The uniqueness of this paper is its interpretation of risks to each of the disaggregated components, while also improving credibility of decisions taken by policy makers at the Bank of Sierra Leone [BSL]. Empirically, Food and Non-Alcoholic Beverages, Housing and Health components indicate that shock arising from within or outside of Sierra Leone can significantly impact headline CPI, with immediate pass-through effect of high prices on consumers’ spending, at least in the short-run. The outcome of this empirical research shows uniqueness of the disaggregated model in tailoring policy makers’ attention towards targeting sector-specific policy interventions. Fan Charts produced have also highlighted degree of risks, which is based on confidence bands, which shows deviation from the baseline forecast. The ultimate goal is to improve sectoral productive capacity, while at the same time, monitoring price volatility spill-over through empirical disaggregation of the CPI basket – in association with this, outcome from the study also shows that the use of multivariate models like VAR would be welcome to monitor events on price dynamics in the national economy.

Use of Contextual and Model-Based Information in Behavioural Operations

Despite the improvements in statistical forecasting, human judgment remains essential in business forecasting and demand planning. Typically, forecasters do not rely solely on statistical forecasts; they also adjust forecasts according to their knowledge, experience, and information that is not available to the statistical models. However, we have limited understanding of the adjustment mechanisms employed, particularly how people use additional information (e.g. special events and promotions, weather, holidays etc.) and under which conditions this is beneficial. Based on a UK-retailer case study, we first establish how event-driven software is used. We build on this by laboratory experiments that simulate a typical supply chain forecasting process. We provide past sales, statistical forecasts (simple baseline forecasts or statistical forecasts that include promotional effects) and qualitative information about past and future promotional periods. We find that when adjusting, forecasters tend to focus on model-based anchors, such as the last promotional uplift and the current statistical forecast, ignoring past baseline promotional values and additional information about previous promotions. The impact of contextual statements for the forecasting period depends on the type of statistical predictions provided: when statistical forecasts with promotional effects are presented, people tend to misinterpret the provided information and over-adjust, harming accuracy.

Informality and the Challenge of Pension Adequacy: Outlook and Reform Options for Peru

Past reforms have put the Peruvian pension system on a largely fiscally sustainable path, but the system faces important challenges in providing adequate pension levels for a large share of the population. Using administrative microdata at the affiliate level, we project replacement rates in the defined benefit (DB) and defined contribution (DC) pillars over the next 30 years and simulate the impact of various reform scenarios on the average level and distribution of pensions. In the DB pillar, the regressive minimum contribution period should be re-thought, while in the DC pillar a broadening of the contribution base and/or an increase in contribution rates would help increase replacement rates relative to the baseline forecast of 25-33 percent. A higher net real rate of return than assumed in the baseline would also have a significant positive impact. In the medium-term, labor market reform to tackle informality, and a broad pension reform to restructure the system and avoid competition between the DB and DC pillars should be a priority. Given low pension coverage, having a strong non-contributory pillar will remain important for the foreseeable future.

World economy

Financial market moves in recent months suggest that there is increasing concern about a substantial global growth slowdown or even a recession. But we continue to see this as an over‐reaction to the weakening economic data; while the downside risks to the global outlook have clearly risen, our baseline forecast shows GDP growth of 2.7% in both 2019 and 2020, little changed from three months ago and only a touch weaker than the likely 3% rise in 2018.

World Economic Prospects Monthly

Overview: Market falls overstate loss of momentum ▀ Financial market moves in recent months suggest that there is increasing concern about a substantial global growth slowdown or even a recession. But we continue to see this as an over‐reaction to the weakening economic data; while the downside risks to the global GDP growth outlook have clearly risen, our baseline forecast for 2019 is little changed at 2.7%, down from 3% in 2018. ▀ Recent economic news confirms that the Q3 economic soft patch appears to have spilled over into Q4, particularly in the industrial sector which has seen a broad‐based loss of momentum in many economies coinciding with a further slowdown in global trade growth. But while surveys of service sector activity have also moderated, the falls have been rather less abrupt, suggesting that overall global GDP growth is slowing albeit not alarmingly so. ▀ On balance, we think that the weaker data do not provide compelling evidence that global growth is slowing more sharply than our December forecast. Although the financial market sell‐off and associated tightening in financial conditions will impinge on growth, this may at least be partly offset by weaker inflation in response to lower oil prices, now seen at US$61pb in 2019. This, combined with the continued strength of labour markets and the likelihood of further moderate wage growth, points to a further period of solid household spending growth. ▀ Nonetheless, the risk of a sharper slowdown has risen. Cyclical risks have increased over the past couple of years as spare capacity has diminished. And uncertainty over the economic and financial market impact of the unwinding of central balance sheets have added to the risk of policy mistakes. ▀ Although our central view is that the recent financial market correction will not morph into something rather nastier, further sustained weakness (particularly if accompanied by dollar strength) would have more significant implications for activity and could see world growth falling below the 2016 post‐crisis low of 2.4%.

A Macroeconometric Model for Kazakhstan

The paper builds a structural macroeconometric model for Kazakhstan to generate short-term and medium-term forecasts for main macroeconomic variables and conduct scenario analyses based on dynamic simulation of the model. Due to the poor quality of quarterly data on GDP and its expenditure components, they have been adjusted using volume indexes. The model consists of aggregate supply, aggregate demand, labor market, asset market, the central bank policy and government side equations. Most equations are estimated via econometric techniques and identities are explicitly introduced in line with economic theory. We combine all the regression equations into a single model and solve for the baseline scenario from 2003 to 2017. The simulation results show that the structural macroeconometric model approximates Kazakhstani economy reasonably well. Ex-ante forecasts under oil prices remaining around 50 and 60 US dollars per barrel are generated and compared with the baseline forecast of the National Bank of the Republic of Kazakhstan.

'No‐deal’ Brexit would knock 2% off GDP by end‐2020

▀ If the two sides fail to finalise a withdrawal agreement and the UK leaves the EU in disorderly fashion in March 2019, it would cause a significant slowdown in the UK economy. Trade would be subject to additional frictions and we would expect to see a substantial sterling depreciation. The impact could be mitigated by looser monetary and fiscal policy, but we would still expect the level of GDP at the end of 2020 to be just over 2% lower than our baseline forecast. ▀ If negotiations break down in late‐2018, the UK would only have time to re‐establish the most critical of the hundreds of international trade and regulatory treaties that it is currently party to via its EU membership. So from March there would be a substantial increase in non‐tariff barriers, as well as tariffs being levied on UK‐EU trade. ▀ We would expect financial markets to respond negatively to a ‘no‐deal’ scenario, with both sterling and, to a lesser extent, the euro depreciating against the dollar, while equity prices and gilt yields would also be lower than in our baseline forecast. We predict that sterling would depreciate by 10% on a trade‐weighted basis by Q2 2019. This would mitigate some of the damage to exports from additional trade frictions. But, combined with the impact of imposing tariffs on imports from the EU, it would push UK inflation above 4% in mid‐2019, severely squeezing households. ▀ We would expect the Bank of England to look through the temporary spike in inflation and cut Bank Rate back to 0.25%. We also assume that the government would divert the funds it had earmarked for the ‘divorce bill’ into higher government consumption and to tolerate the higher borrowing caused by weaker economic growth. ▀ Looser fiscal and monetary policy should prevent a deeper downturn, but our scenario still sees the level of GDP 2.1% below the baseline (which assumes a deal and a transitional period) at end‐2020 and 2.7% lower by 2023. Its close trade links with the UK and heavy reliance on imported goods means the short‐term impact on Ireland would be significant, but the impact on the larger Eurozone economies is smaller.

World economy

For now, the global economy continues to perform fairly strongly, despite the gloomy mood music, and the outlook for 2019 remains favourable. But we think that the risks and challenges will increase as we head into 2020 and the risk of a larger slowdown or even recession then have grown. Nonetheless our baseline forecast is for global GDP growth to ease from 3.1% this year to 2.8% in 2019 and 2.7% in 2020, little changed from three months ago.

Using probabilistic analysis to improve greenhouse gas baseline forecasts in developing country contexts: the case of Chile

ABSTRACTIn this paper, initial steps are presented toward characterizing, quantifying, incorporating and communicating uncertainty applying a probabilistic analysis to countrywide emission baseline forecasts, using Chile as a case study. Most GHG emission forecasts used by regulators are based on bottom-up deterministic approaches. Uncertainty is usually incorporated through sensitivity analysis and/or use of different scenarios. However, much of the available information on uncertainty is not systematically included. The deterministic approach also gives a wide range of variation in values without a clear sense of probability of the expected emissions, making it difficult to establish both the mitigation contributions and the subsequent policy prescriptions for the future. To improve on this practice, we have systematically included uncertainty into a bottom-up approach, incorporating it in key variables that affect expected GHG emissions, using readily available information, and establishing expected baseline emissions trajectories rather than scenarios. The resulting emission trajectories make explicit the probability percentiles, reflecting uncertainties as well as possible using readily available information in a manner that is relevant to the decision making process. Additionally, for the case of Chile, contradictory deterministic results are eliminated, and it is shown that, whereas under a deterministic approach Chile’s mitigation ambition does not seem high, the probabilistic approach suggests this is not necessarily the case. It is concluded that using a probabilistic approach allows a better characterization of uncertainty using existing data and modelling capacities that are usually weak in developing country contexts.Key policy insightsProbabilistic analysis allows incorporating uncertainty systematically into key variables for baseline greenhouse gas emission scenario projections.By using probabilistic analysis, the policymaker can be better informed as to future emission trajectories.Probabilistic analysis can be done with readily available data and expertise, using the usual models preferred by policymakers, even in developing country contexts.

Some Implications of Uncertainty and Misperception for Monetary Policy

When choosing a strategy for monetary policy, policymakers must grapple with mismeasurement of labor market slack, and of the responsiveness of price inflation to that slack. Using stochastic simulations of a small-scale version of the Federal Reserve Board’s principal New Keynesian macroeconomic model, we evaluate representative rule-based policy strategies, paying particular attention to how those strategies interact with initial conditions in the U.S. as they are seen today and with the current outlook. To do this, we construct a current relevant baseline forecast, one that is loosely constructed based on a recent FOMC forecast, and conduct our experiments around that baseline. We find the initial conditions and forecast that policymakers face affects decisions in a material way. The standard advice from the literature, that in the presence of mismeasurement of resource slack policymakers should substantially reduce the weight attached to those measures in setting the policy rate, and substitute toward a more forceful response to inflation, is overstated. We find that a notable response to the unemployment gap is typically beneficial, even if that gap is mismeasured. Even when the dynamics of inflation are governed by a 1970s-style Phillips curve, meaningful response to resource utilization is likely to turn out to be worthwhile, particularly in environments where resource utilization is thought to be tight to begin with and inflation is close to its target level.

A long dollar fall: likelihood and consequences

▀ The dollar has tended to move in long swings over the last forty years, raising the risk that the recent decline could extend considerably further. This is not our base case, but risks do look skewed towards additional dollar weakness. Our modelling work suggests that a large further dollar slide would have significant effects on the pattern of world growth – the US and some emerging markets would gain, with other advanced economies the main losers. ▀ There have been several large multi‐year swings in the dollar over the last four decades. We identify seven such episodes since 1971 including three long declines averaging 31%, the last being in 2002‐08. Since 2017 the dollar has fallen 10%, implying a possible further considerable drop. ▀ Our dollar strength indicator, which covers a range of economic variables associated with dollar moves in the past, does not currently point to a re‐run of the dollar weakness of the 2000s. But we do expect some further near‐term dollar losses and risks to our baseline forecast look skewed to the downside, especially given the emergence of large twin deficits in the US. ▀ Should a further large dollar slump nevertheless occur, our modelling suggests large effects on the pattern of world growth. The main gainers would be commodity‐producing emerging markets (EM) benefitting from improved terms of trade, positive balance sheet and external liquidity effects and scope to ease local interest rates. Rising US yields would erode some of these gains in later years. ▀ The main initial losers would be advanced economies outside the US which would lose competitiveness. In the case of the Eurozone and Japan, undershoots of inflation targets would be likely. There could also be some other negative consequences such as stoking protectionism and creating financial bubbles in some EMs.

Higher interest rates should not unduly faze consumers

▀ Though the MPC has signalled a more aggressive pace of interest hikes than previously anticipated, we still expect the impact on the consumer sector in aggregate to be modest. We estimate that household debt servicing costs will rise from the current level of 4.1% of household income to 5.0% by the end of 2019. This would still be only a little over half the pre‐crisis peak. ▀ We expect the MPC to hike interest rates twice in both 2018 and 2019, taking Bank Rate to 1.5% by the end of next year. Higher interest rates will impact on consumer spending by increasing debt servicing costs and reducing the attractiveness of credit (including mortgages), but savers will benefit from higher returns on their deposits. ▀ Mortgages account for 77% of loans to UK households and full pass through of a 100bp rise in Bank Rate to variable rate loans, implying an increase from 2.78% to 3.78%, would add £100 a month to the cost of servicing an average mortgage. But only two‐fifths of borrowers have a variable rate deal, so for many homeowners the adjustment to higher interest rates will not be immediate. And the proportion of houses which are owned via a mortgage has fallen over the past decade, suggesting that the household sector as a whole will be less sensitive to higher mortgage interest rates. ▀ Historically the relationship between Bank Rate and interest rates on unsecured lending has been weak and rates on credit cards and personal loans have not yet risen following November's rate hike. The link to deposit rates has been stronger and higher returns on savings will mitigate some of the damage to household income from higher debt servicing costs, although uneven distribution of debt and savings means that there will be winners and losers at a more disaggregated level. ▀ We have used the Oxford Economics Global Economic Model to run a counterfactual scenario where Bank Rate is kept at 0.5% throughout 2018 and 2019. The results suggest that the pace of rate hikes assumed in our baseline forecast would reduce the level of consumer spending by 0.2 percentage points by the end of 2019.

THE SENSITIVITY OF CO2 EMISSIONS UNDER A CARBON TAX TO ALTERNATIVE BASELINE FORECASTS

Future carbon dioxide (CO2) emissions under a carbon tax depend on the time-path of the economy under baseline (business-as-usual) conditions as well as the extent to which the policy reduces emissions relative to the baseline. Considerable uncertainties surround the baseline forecasts for fuel prices, energy efficiency (energy-GDP ratios), and GDP, as evidenced by the significant ranges in the forecasts by government agencies and research institutions in the U.S. This paper assesses the significance of these uncertainties to the path of CO2 emissions under a carbon tax. We do this by examining the emissions levels and quantities of abatement that result from the E3 general equilibrium model under a range of alternative baseline forecasts for fuel prices, energy efficiency, and GDP, where the different baselines are produced through suitable changes to key model parameters. In addition, we consider how the time-profile of the carbon tax needed to achieve specified CO2 abatement targets is affected by such forecast-linked changes in parameters. We find that the sensitivity of baseline emissions to alternative forecasts depends on the particular forecasted variable under consideration. Baseline CO2 emissions are highly sensitive to alternative scenarios related to the rate of energy efficiency improvements in the nonenergy sector and the rate of general economic growth. In contrast, such emissions are much less sensitive to alternative scenarios related to the productivity of fossil fuel production. The extent of abatement from the baseline is generally fairly insensitive to changes in the scenarios for time-paths of fuel prices, energy-efficiency and GDP. We also find that short-term emissions targets can be achieved with relatively moderate carbon taxes under all of the baseline scenarios considered.

Understanding low female labour force participation: Policy evaluation using microsimulation

We project medium to long term trends in labour force participation and employment for selected low-participation EU countries (Italy, Spain, Ireland, Hungary and Greece), with Sweden as a benchmark, by means of a dynamic microsimulation model. By exploring alternative scenarios to our baseline forecasts and their implications for GDP growth, we find that the gap between male and female participation is mostly explained by (i) differences in the individual conditional behaviour of older female cohorts, (ii) inadequate family policies. In particular, our results show that the conditional behaviour of younger women in the low-participation countries is similar to that in Sweden. In a nutshell, what is needed is not a change of behaviour on the side of women but a change of mentality on the side of institutions and firms.

Explaining Inflation in Colombia: A Disaggregated Phillips Curve Approach

We study inflation dynamics in Colombia using a bottom-up Phillips curve approach. This allows us to capture the different drivers of individual inflation components. We find that the Phillips curve is relatively flat in Colombia but steeper than recent estimates for the U.S. Supply side shocks play an important role for tradable and food prices, while indexation dynamics are important for non-tradable goods. We show that besides allowing for a more detailed understanding of inflation drivers, the bottom-up approach also improves on an aggregate Phillips curve in terms of forecasting ability. In the baseline forecast scenario, both headline and core inflation converge towards the Central Bank’s inflation target of 3 percent by end-2018 but these favorable inflation dynamics are vulnerable to large supply shocks.

Explaining Inflation in Colombia: A Disaggregated Phillips Curve Approach

We study inflation dynamics in Colombia using a bottom-up Phillips curve approach. This allows us to capture the different drivers of individual inflation components. We find that the Phillips curve is relatively flat in Colombia but steeper than recent estimates for the U.S. Supply side shocks play an important role for tradable and food prices, while indexation dynamics are important for non-tradable goods. We show that besides allowing for a more detailed understanding of inflation drivers, the bottom-up approach also improves on an aggregate Phillips curve in terms of forecasting ability. In the baseline forecast scenario, both headline and core inflation converge towards the Central Bank’s inflation target of 3 percent by end-2018 but these favorable inflation dynamics are vulnerable to large supply shocks.

Impact of tobacco smoking prevalence on cardiovascular and non-cardiovascular deaths in England and Wales, 2017–40: a modelling study

BackgroundSmoking generates a huge burden of morbidity and mortality globally and in the UK. We aimed to estimate the impact of two smoking reduction scenarios on numbers of deaths to 2040 in England and Wales. MethodsWe developed a probabilistic Markov model, IMPACT-BAM, to integrate calendar trends in the incidence of cardiovascular disease, dementia, disability, and mortality to forecast future prevalence of these conditions in addition to numbers of deaths from cardiovascular and non-cardiovascular causes in the population of England and Wales. We used data from the English Longitudinal Study of Ageing and Office for National Statistics to inform the model. Systematic reviews and meta-analyses provided relative risks of cardiovascular disease, dementia, disability, and mortality among smokers by age and sex. We estimated the future numbers of cardiovascular and non-cardiovascular conditions and deaths in the England and Wales population to 2040 (baseline forecast). We then quantified the potential benefits of two contrasting tobacco policies. FindingsIf smoking prevalence remains at current levels of 19% in men (17% in women), between 2017 and 2040 there will be an estimated 950 000 deaths from cardiovascular causes (95% uncertainty interval [UI] 576 000–1 915 000) and about 10 770 000 deaths from non-cardiovascular causes (8 022 000–14 112 000) in the population aged 65 years and over. If smoking prevalence continues to decline by 0·7% per year (as observed over the past decade), by 2040 there will be an estimated 19 000 fewer deaths from cardiovascular causes (95% UI 3700–58 000) and 170 000 fewer deaths from non-cardiovascular causes (89 000–289 000). If smoking prevalence is reduced to 9% by 2020 and 5% by 2025, there will be 34 000 fewer deaths from cardiovascular disease (95% UI 8200–111 000) and 349 000 fewer deaths from non-cardiovascular causes (188 000–574 000). InterpretationPublic health programmes targeting tobacco smoking could potentially prevent over a third of a million cardiovascular and non-cardiovascular deaths by 2040. FundingBritish Heart Foundation (grants RG/13/2/30098, RG/16/11/32334).

World Economic Prospects Monthly

Overview: world GDP growth to pick up further in 2018 ▀ Recent developments suggest that the solid performance of the world economy is being maintained and that the omens for 2018 are positive. So we have raised our global GDP growth forecast for 2018 slightly from 3.0% to 3.1% – a little stronger than the 2.9% rise we expect this year and the best result since 2011. ▀ Global GDP probably expanded by 0.8% in Q3 for the second quarter running, which would mark the best six‐month growth performance since the post‐global financial crisis rebound in 2010. It is too soon to make strong judgements about the exact pace of growth in Q4, but as yet the business surveys and trade indicators show no obvious sign of a slowdown in the recovery or world trade growth. ▀ In response to the ongoing positive tone of the data, we have raised our 2018 GDP growth forecasts slightly for several economies, including the US, China and the Eurozone, in turn lifting our 2018 world growth forecast to 3.1%. We expect the recent healthy pace of trade growth to carry over into next year and have raised our world trade growth forecast for 2018 from 3.7% to 4.2%, before a modest slowdown to about 4% in 2019. ▀ Based on this and some modest upward revisions to our oil and commodity prices forecasts for 2018, prospects look more favourable for commodity exporters and economies that are heavily integrated into global manufacturing chains in both the advanced world and emerging markets. ▀ Political uncertainties remain a downside risk. But economic risks may be tilted to the upside, as we see only a gradual response by central banks to the favourable economic backdrop. Another upside risk is that the US government unleashes a €1.5trn fiscal boost, which is rather larger than assumed in our baseline. This could lift US growth in 2018 to 3% or so and would have spillovers for the rest of the world and make our baseline forecast for both trade and investment growth to slow look too cautious. But beyond next year, the real impact is more ambiguous as it would be likely to trigger a faster pace of tightening by the Fed.

Global wages: we don't (yet) have lift-off

Economic OutlookVolume 41, Issue 3 p. 13-16 Feature article Global wages: we don't (yet) have lift-off First published: 10 August 2017 https://doi.org/10.1111/1468-0319.12289AboutPDF ToolsRequest permissionExport citationAdd to favoritesTrack citation ShareShare Give accessShare full text accessShare full-text accessPlease review our Terms and Conditions of Use and check box below to share full-text version of article.I have read and accept the Wiley Online Library Terms and Conditions of UseShareable LinkUse the link below to share a full-text version of this article with your friends and colleagues. Learn more.Copy URL Share a linkShare onFacebookTwitterLinkedInRedditWechat Abstract ▀ Policymakers, most notably in the US, have been expecting wage growth to pick up for some time as job markets tighten. But the data over the last six months have shown few indications of wage lift-off. Our review of the latest evidence suggests that although labour markets are, on the whole, still tightening, we see increased downside risks to our forecasts for faster global wage growth in 2018–19. ▀ Rates of “churn” in labour markets – a possible precursor to faster wage growth – have continued to rise in the US and parts of Europe. ▀ But other structural factors may still be holding wages down. A recovery in prime-age participation in the US may be helping to cap wage rises, as may a pool of “underemployed” workers in the US and UK (though this pool is shrinking fast). ▀ Productivity growth also remains weak, running at a 0.5%–1% annual pace in Q1 2017 across the US, UK, Germany and Japan. This compares with a G7 average pace of 1.5% per year in 1985–2006. ▀ Overall, the risks to our baseline forecast of faster wage growth in the major economies in 2018 look skewed to the downside. We expect wage growth to firm in 2018 by 0.5–1 percentage points in the US, UK, Germany and Japan. We would give this modal forecast a probability of around 60%, but with a 25% chance that wage growth is somewhat slower than this and only a 15% chance that it is higher. Volume41, Issue3July 2017Pages 13-16 RelatedInformation

Sensitivities of 1-km Forecasts of 24 May 2011 Tornadic Supercells to Microphysics Parameterizations

On 24 May 2011, Oklahoma experienced an outbreak of tornadoes, including one rated EF5 on the enhanced Fujita (EF) scale and two rated EF4. The extensive observation network in this area makes this an ideal case to examine the impact of using five different microphysics parameterization schemes, including single-, double-, and triple-moment microphysics, in an efficient high-resolution data assimilation system suitable for nowcasting and short-term forecasting with low latencies. Additionally, the real-time configuration of the 1-km ARPS, which assimilated increments produced by 3DVAR with cloud analysis using incremental analysis updating (IAU), had success providing a good baseline forecast. ARPS forecasts of 0–2 h are verified using observation-point, neighborhood, and object-based verification techniques. The object-based verification technique uses updraft helicity fields to represent mesocyclone centers, which are verified against tornado locations from three supercells of interest. Varying levels of success in the forecasts are found and appear to be dependent on the complexity of the storm interaction, with early forecasts of isolated storms exhibiting the most success. Verification scores indicate that the multimoment microphysics schemes tend to produce better forecasts of tornadic supercells. However, some of the forecasts from the single-moment microphysics schemes perform as well as or better than the forecasts from the multimoment microphysics schemes.