The uncertainty bands are based on the Riksbank’s historical forecasting errors for these variables.6 The uncertainty increases as the forecast horizon lengthens. When one evaluates forecasts, one usually compares the current forecasts with a naïve forecast. Here I shall use the average of the series as a naive forecast. The forecasting error is measured as the standard deviation between outcomes and forecasts and the forecasting error for the naïve forecast is measured as the standard deviation for the outcomes themselves. The forecasting performance can then be expressed as how much smaller the actual forecasting error is than the forecasting error of the naive forecast. This measure of the forecasting performance is 1.0 if our forecasts are perfect and 0.0 if our forecasts are no better than the historical average. Figure 6 shows the forecasting performance for GDP growth and CPI inflation at 1–12 quarters ahead.7 As the figure refers to annual percentage changes, the first quarters are mixtures of known outcomes and forecasts. It is only four quarters after the most recent known outcome that we have pure forecasts. The figure shows that the forecasting error with regard to forecasts one year ahead is just over 20 per cent less than the forecasting error for the intended naïve forecast and not at all less two and three years ahead.
I think that monetary policy can best be understood in terms of the yield curve. The Riksbank implements its monetary policy by determining the repo rate, the interest rate the banks face when depositing money in accounts with the Riksbank overnight, or when borrowing money overnight. Thus, the Riksbank determines the short end of the yield curve. But the market determines the long end. Everything in between is a combination of the Riksbank’s influence and market forces. The long end is affected by many factors, not merely expectations of the repo rate. It may, as recently, be a question of a flight to safety, which has pushed up, for instance, Greek interest rates and pushed down American, German and Swedish interest rates. The Swedish yield curve is currently much lower than is consistent with the Riksbank’s repo-rate path (see Figure 14). Moreover, the banks’ lending rates are affected by other factors than the repo rate, which has led to increased spreads between the repo rate and the banks’ lending rates. This means that what is known as the transmission mechanism – how the Riksbank’s repo rate affects economic developments – has probably changed. But it is difficult to say how it has changed. On the whole, we should develop the financial part of our macroeconomic models to give greater consideration to the financial markets.