Interpolating forecast errors for assessing uncertainty in macroeconomic forecasts : an analysis for Malta

Abstract

This paper presents an analysis of forecasting errors of the Economic Policy Department's forecasts for Malta. Based on this analysis an approach for carrying out a risk assessment of macroeconomic forecast is proposed. In particular, this paper contains: 1. an evaluation of the Economic Policy Department's macroeconomic forecast errors since 2004, 2. a comparison of Economic Policy Department's forecasting performance with that of the European Commission and the Central Bank of Malta, 3. an assessment of Malta's forecast performance compared with that of other European economies, 4. an evaluation of possible biases in the forecast, and finally, 5. a methodology for the illustration of forecast uncertainty and the balance of risk surrounding our forecast through the use of Fan Charts. The publication is in line with the requirements of Council Directive 2011/85/EU of the European Union on the requirements for budgetary frameworks of the Member States. As from 2014, the Directive binds Member States to guide their macro-economic and budgetary forecasts by the performance of past forecasts and endeavour to take into account relevant risk scenarios. The risk assessment developed in this paper follows the methodology suggested by Selim Elekdag and Prakash Kannan (2009) in their seminal IMF working Paper and will become a regular feature of the Economic Policy Department's published macroeconomic forecasts.