Bank of Finland's forecast errors in 2004-2010

The Bank of Finland's Monetary Policy and Research department prepares a macroeconomic forecast twice a year for the current calendar year and the following two years. The forecast describes the most probable developments in the economy at the forecast date. In addition to the Finnish economy, the forecast also examines inter-national developments. However, interest and exchange rates are assumed to develop in line with financial market expectations, and no forecast is prepared for them. This article examines the accuracy of forecasts with respect to GDP inflation, unemployment and the components of GDP. An analysis of forecast errors is topical, as the Bank of Finland forecast model has recently been updated. In 2004-2009 the Bank prepared its fore-casts using a general equilibrium model of the Finnish economy named Aino.1 In spring 2010 the Bank introduced a new estimated version of the Aino model 2.