EP 102 . tex What Is Good and What is Bad with the Eurosystem ’ s Published Forecasts , and How Can They Be Improved

Eurosystem …nally published its eagerly awaited in ‡ation forecast (as well as a forecast of GDP growth). It did so after having been provoked and prodded to do so, by the European Parlia-ment's Committee on Economic and Monetary A¤airs and a large number of external observers and commentators, since the announcement of the Eurosystem monetary-policy strategy in the fall of 1998. This Brie…ng Paper discusses what is good and bad with these forecasts and how they could be improved. The primary objective of Eurosystem monetary policy is to maintain price stability, de…ned as an annual increase in the HICP below two percent. 1 Because of the lags in the e¤ects of monetary-policy actions on aggregate demand and in ‡ation, monetary-policy actions cannot a¤ect current in ‡ation and output, nor in ‡ation or output in the near future. A rough benchmark is that monetary policy a¤ects output in about a year and in ‡ation in about two years. Therefore, Eurosystem monetary policy has to be guided by in ‡ation forecasts about two years ahead. As discussed further in Svensson [5], for successful policy, the Eurosystem must construct conditional in ‡ation forecasts. These forecasts should depend on all relevant information, including the Eurosystem's view of the transmission mechanism for monetary policy, its view of the current economic and monetary situation within and outside the Euro area, information ¤ Brie…ng paper for the Committee on Economic and Monetary A¤airs (ECON) of the European Parliament for the quarterly dialogue with the President of the European Central Bank. I thank Annika Andreasson for secretarial and editorial assistance. Expressed views and any errors are solely my own responsibility. 1 As many commentators have suggested, it would be better to formulate this de…nition in an unambiguous and symmetric way as a point in ‡ation target, say 1.5%, possibly with a tolerance interval, §1%.