Evaluation of Norges Bank’s Projections for 2001 and 2002

Norges Bank’s projections for developments in the Norwegian and international economy form an important basis for monetary policy decisions. Norges Bank places emphasis on the importance of evaluating the projections in the Inflation Report and on transparency in our forecasting work. It is important to analyse forecast errors to improve the quality and accuracy of our projections. In addition to the series of articles containing evaluations of Norges Bank’s projections, the assessments on which monetary policy decisions have been based are also included in the Bank’s Annual Report. Low and stable inflation has been Norges Bank’s operational objective for monetary policy since March 2001. The inflation target is set at 2½ per cent. An optimal monetary policy is forward-looking and takes account of long and variable lags associated with monetary policy decisions. This is why inflation-targeting central banks use projections for future price inflation as a basis for monetary policy decisions. This article analyses Norges Bank’s projections for 2001 and 2002 as presented in Inflation Report 4/2000. Our projections for consumer price inflation receive particular emphasis, but we also look at the projections for other macroeconomic variables given the impact they have on consumer price inflation. Consumer price inflation, as measured by the CPI-ATE, was approximately in line with our projection in 2001 and 2002. Wage growth was higher than expected. The projection nevertheless proved to be accurate partly because imported price inflation was low as a result of a higher-than-projected krone exchange rate. The analysis stresses that our understanding of wage formation requires greater emphasis on sheltered industries