The Numbers Behind the Central Bank Rankings

All G-7 central banks struggle with accurate forecasting, but who comes out on top? We looked at five different measures to see how well central banks have forecast their own economies.

Bloomberg collected economic forecasts and data from Group of Seven central banks and compared their performance in forecasting their own economies over the last 10 years. The story describing the results can be found here. The various ways the data was sliced and diced allows both qualitative and quantitative comparisons. The full methodology can be found here.

Which central bank was the most accurate?

According to the mean squared forecast error of our data, weighted using the Taylor Rule approach, the Bank of Canada is the best forecaster and ranks at the top for both growth and inflation forecasts.

Which central bank is the most optimistic or pessimistic?

All central banks are sometimes optimistic on gross domestic product, but the Federal Reserve overestimated GDP growth nine out of 10 years. The Bank of Canada was the only bank to be consistently optimistic on inflation, while the Bank of England underestimated inflation in seven out of eight periods.

Which bank was most accurate compared with the  IMF?

The ECB was the only central bank that was consistently more accurate than the IMF on growth, with a lower forecast error in eight out of 10 years. The Federal Reserve was most accurate on inflation, beating IMF forecasts in three out of five years.

Where was the most volatility in forecasting?

The Great Recession after the collapse of Lehman Brothers produced the biggest misses in forecasting accuracy, upending the projections of every central bank. The recession did the most damage to the forecasts of the Bank of Japan in the 2008-2009 fiscal year; the BOJ also had the largest range of errors for both growth and inflation in the 10-year period. The Bank of England had the biggest inflation miss in 2011, undershooting by 3.08 percentage points, but had the second lowest GDP miss.

 Which economies have the most volatility?

Historically, growth and inflation in Japan have been the most volatile, and the euro area and the U.K. are on the lower spectrum of volatility for growth. Canada has the lowest volatility in inflation, which explains why it could be easier to forecast this measure. The Fed sits firmly in the middle, which is in line with its forecasting record compared to other banks.

Which economies are the most complex?

According to the MIT economic complexity index, Japan is the most complex economy in the world, while Canada is the least complex of the economies in this study. The U.K. and the U.S. are in the middle of the pack, but both economies have moved down in the rankings between 2011 and 2012. The level of complexity can influence how difficult it is to forecast economies.

NOTES:
Rankings are based on Mean Squared Forecast Error
Japan excluded from IMF comparison since it forecasts on a fiscal year
Euro-area complexity was calculated based on IMF weightings

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