British economy: Want to improve the accuracy of economic forecasting?

Posted by qianjiu on May 7th, 2019

Central bank officials did not predict a major recession in the economy, and there may be no way to predict the next boom. But a new US study shows that there may be ways to increase the accuracy of central bank officials' forecasts.

Analysts and investors continue to train computers to study the central bank's reports to gain a deeper understanding of the content of the decision, or to bet on the financial market accordingly.

The George Washington University research team created a UK economic growth index based on the terminology of the Bank of England's quarterly inflation report.

They found that in the past 20 years, the index was able to predict the UK's economic growth rate in the quarter after the inflation report was released.

Their algorithm is to observe the frequency of words such as "robust", "brisk", or "soft" in the summary part of the Bank of England's quarterly report.

Although the central bank's officially released estimates are better at predicting economic growth, the researchers unexpectedly found that index fluctuations based on the text of the report could have helped to further improve the accuracy of the official forecast figures.

The blue line in the chart is the initial value of the UK's quarterly gross domestic product (GDP) growth (right axis), the green line is the estimated growth rate of the Bank of England in the previous quarterly inflation report (right axis), and the orange line is Growth prospects index based on the Bank of England's inflation report (left axis)