The employment forecasts appear on average to have been more accurate than the GDP forecasts. Forecasts for productivity Productivity is a central variable in the monetary policy analysis. The most common measure of productivity is labour productivity, that is, the ratio between GDP and the number of hours worked. It has not been possible to evaluate this measure here, as there is not enough historical forecasting data on the number of hours worked. Instead the ratio between GDP and employment has been used as an approximation. The analysis shows that our forecasts have under-estimated productivity growth on all forecasting horizons (Figure 4).7 The time series model is on the whole slightly more accurate than our forecasts have been during this period. The forecasting memory for productivity has only extended one quarter ahead (Figure 7). The same applies to the correlation between forecasts and outcomes. It is 0.7 one quarter ahead, while it is zero both one and two years ahead (see Figure 9). Inflation forecasts When it comes to inflation measured as the annual rate of increase in the CPIX, we have made fairly accurate forecasts during a large part of the period evaluated, that is, 2000-2006 (Figure 3). Something we missed was the sharp upturn in inflation in spring 2001. This was primarily due to an outbreak of mad cow disease which led to rising food prices. But since then we have made inflation forecasts that have been close to the outcomes.
A tolerance interval of 1 percentage point on either side of the target was included mainly to make it clear that deviations would probably occur but also that they should be limited. The target was tied to the consumer price index, the measure of inflation that was most familiar and reliable, besides being published regularly. There is a great deal to say about this — the choice of the target’s level and the choice of index — in the light of our experience and the academic literature that accumulated in the 1990s. I shall have to be brief, however, because otherwise there will be no time for the more practical issues about our procedures, which is today’s theme. So here are three short comments: •  The appropriate level of inflation is one debatable point. There are arguments for a somewhat higher level as well as a somewhat lower. With our present knowledge, this is ultimately a matter of judgement and so far there has been nothing to persuade me that there are any grounds at present for changing our target. As I see it, the most important thing is to set up a distinct target so that a given rate of inflation is anchored among all economic agents, be they households or firms, employers or employees. In this we have been very successful. •  The choice of an index is a complicated matter.