An econometric model for inflation forecasting to short and medium range
The "Econometric Model" is an empirical macroeconomic model used for short-term inflation forecasting in the research division. In recent years, the model has undergone several improvements and adjustments to improve its forecast quality, particularly for four months to a year, and it is presented here in its updated version. From a comparison with external forecasters and naive forecasts, it seems that the quality of the model's forecast for up to three months is better than naive alternatives, while the quality of the forecast for a year is similar to the alternatives. Therefore, the econometric model can also be used for this long-term forecast. In such use, it is possible to utilize the model's advantages, the main of which, along with micro-analyses, is a macro-analysis of the aggregate economy. These advantages are reflected in the analysis of inflation components and the ability to make judgments at the macro and micro levels. In order to adapt the model to the decrease in interest rates and the Bank of Israel interest rate being near the effective lower bound, a zero lower bound to the nominal interest rate and an anchor rate which changes according to the long-term market interest rates were applied in the model.