The Riksbank makes forecasts
Forecasts for the real economy and inflation and analyses of the effects of monetary policy on the financial markets, the real economy and inflation are central to the monetary policy decision-making data.
In the forecasting work prior to a monetary policy decision, the Riksbank begins by making an assessment of economic activity and inflation abroad, with a particular focus on developments in Europe and the United States. Developments in the financial markets are then assessed, including the exchange rate and interest rates. International price developments and the exchange rate are important determinants since they affect price developments for goods and services imported to Sweden. Finally, the Riksbank forecasts economic activity, which is a key determinant of domestic inflation.
The forecasting work is an interplay between models and assessments
The methods for making forecasts are continuously evolving, and the Riksbank has a set of models that are used to make as good an analysis as possible of the current economic situation, economic developments in the short to medium term and the effects of monetary policy measures.
To form an idea of where the economy is to start with, different types of indicators are used in addition to outcome data, for example, for production, the state of the labour market, pricing plans and confidence among households and companies. When making short-term forecasts (one to two quarters ahead), greater emphasis is placed on time series models and indicator models that have good short-term forecasting characteristics. Long-term forecasts are made more widely with the aid of macromodels and assumptions on long-term equilibrium, which together with the monetary policy assumptions provide a coherent assessment of the driving forces of economic development. In addition, smaller models are used that focus solely on selected economic relationships.
Since models are simplifications of reality, model forecasts are a good starting point that helps structure the discussions and focus on the most central issues for monetary policy. To varying degrees, models assume that history repeats itself or that economic relationships are stable over time, and therefore they also need to be supplemented by analyses and judgements by experts who have an insight into mechanisms and economic developments that the models do not always capture. The overall information from the models is finally weighed together with other information to produce forecasts for economic activity and inflation. The experts’ assessments become particularly important when unusual events and/or structural changes that alter the functioning of the economy take place.
The latest forecasts on economic developments can be found in the Riksbank’s Monetary Policy Report.
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