Setting the Operational Framework for Producing Inflation Forecasts

How should a central bank organize itself to produce the best possible inflation forecast? This paper discusses elements for building a comprehensive platform for an inflation forecasting framework. It describes the exercise of forecasting inflation as a production process, which induces a strict discipline concerning data management and collection, the use of a suitable statistical apparatus, and the exercise of sound communication strategies to reinforce reputation and credibility. The efficient organization of the central bank becomes critical in producing relevant macroeconomic forecasts, with special consideration to product design, the essential requirements needed in the forecasting process, and key related organizational issues. In addition, the paper proposes to factor the authorities’ policy responses into inflation forecasts to ensure consistency with the spirit of the inflation targeting framework.